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6 Umbrella Clause and Investment Contracts

From: Chinese Investment Treaties: Policies and Practice

Norah Gallagher, Wenhua Shan

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2021. All Rights Reserved. Subscriber: null; date: 18 June 2021

Subject(s):
Umbrella clause — Jurisdiction — Awards

(p. 203) UMBRELLA CLAUSE AND INVESTMENT CONTRACTS

A.  Introduction

6.01  The application of the umbrella clause has caused much excitement and debate in the past few years.1 The ‘umbrella clause’ takes its name from its main objective, namely to oblige the host state to observe any commitments it has entered into with regard to foreign investors. The clause brings such obligations of the state under the protection of an applicable international investment treaty, BIT, or multilateral treaty.2 The umbrella clause can have far-reaching implications, the (p. 204) exact boundary of which is yet to be delimited. As rightly noted by F A Mann, the umbrella clause ‘is a provision of particular importance in that it protects the investor against any interference with his contractual rights, whether it results from a mere breach of contract or legislative or administrative act’.3 Recent decisions by different arbitration tribunals on this matter suggest that the extent to which such clauses might ‘elevate’ contractual obligations between a host state and a foreign investor to the level of treaty obligations is far from settled.4

6.02  Umbrella clauses arguably cover both contractual and non-contractual obligations.5 However, it is undisputed that this clause is most closely associated with investment contracts, namely state contracts or ‘concession agreements’. Guaranteeing rights under state contracts is arguably the primary purpose of the clause.6 Hence it is best to address the two issues together.

6.03  This chapter will first review the evolution of the umbrella clause and how it has been applied by investment treaty tribunals. It will then examine the main variants of umbrella clauses in Chinese BITs and discuss their legal effect in light of this recent jurisprudence. It then moves on to analyse the impact, if any, of these clauses on investment contracts in China, including joint venture contracts, joint exploitation of onshore and offshore petroleum resources contracts, and build-operate-transfer contracts. The chapter concludes with an analysis of the implications of umbrella clauses and investment contracts on dispute-resolution planning for foreign investors.

(p. 205) B.  Umbrella Clause and International Investment Arbitration

Historic Context

6.04  Since the legal effect of umbrella clauses in China’s BITs has not yet been tested, it is particularly relevant and important to review the application of these provisions in light of recent jurisprudence on this matter by international investment arbitration tribunals. Much has been written recently on the application and legal effect of the umbrella clause.7 This provision appears in both bilateral and multilateral treaties.8 Its origins date back only as recently as the 1950s to the Anglo–Iranian Consortium Agreement of 1954. On the advice of counsel to the National Iranian Oil Company Sir Elihu Lauterpacht QC, a leading public international lawyer, the oil companies sought to insulate the agreement by including an umbrella clause. Its main aim was to provide the stability ‘guaranteed by treaty between the States most directly concerned’.9 Several years later the Abs-Shawcross Draft Convention (p. 206) on Investments Abroad incorporated an umbrella clause.10 This draft served as the basis of the OECD Draft Conventions on the Protection of Foreign Property of 1962 and 1967 which were never adopted.11 The commentary on the umbrella clause confirms that it was an application of the general principle of pacta sunt servanda in favour of the property of nationals of another party.

6.05  The draft MAI contained two formulations of what it referred to as ‘respect clauses’. The first was a standard clause providing that ‘Each Contracting Party shall observe any obligation it has entered into with regard to a specific investment of an investor of another Contracting Party’.12 The second option’s referred to as the substantive approach to the respect clause, provided that ‘Each Contracting Party shall observe any other obligation in writing, it has assumed with regard to investments in its territory by investors of another Contracting Party. Disputes arising from such obligations shall only be settled under the terms of the contracts underlying the obligations’.13 This second option makes clear that the forum selection clause is the only available option to resolve a dispute.

6.06  The first modern form of BIT between Germany and Pakistan in 1959 contained an umbrella clause at Article 7 providing that: ‘Either Party shall observe any other obligation it may have entered into with regard to investments by nationals or companies of the other Party’. This format is almost identical to the standard umbrella clause incorporated by China into its BITs, as elaborated below. Since 1959 over 2500 BITs have been adopted by states, with fewer than half of them containing umbrella clauses.14 Initially these treaty provisions remained untested, with investors seeking redress under alternative treaty rights. This was in large part due to the much smaller number of investment treaty claims that were commenced at that time. With the change in the global economy in the early 1990s, emerging markets, and increases in foreign direct investment, the number of cases grew exponentially.15 The dramatic rise in the number of cases inevitably had an impact on the development of the international legal regime within which (p. 207) FDI takes place. There has been rapid development in such concepts as indirect or creeping expropriation, fair and equitable treatment, in particular on how ‘legitimate expectations’ of the investor are assessed, as well as the interpretation and application of the umbrella clause. It was inevitable that the umbrella clause would come under scrutiny by international arbitral tribunals. It had languished in relative obscurity for almost 50 years, then, rather like the Clapham omnibus, two cases were decided in rapid succession. The impact of the umbrella clause was considered for the first time in 2003.16

The SGS Cases

6.07  Whatever the true intention of the original drafters of the umbrella clause its effect is to bring contractual obligations of the state in relation to investments within the protective provisions of the BIT. This ‘elevation’ or ‘mirror effect’17 does not happen automatically. The exact scope of the umbrella clause was first considered by the tribunal in SGS v Pakistan. The tribunal applied a narrow interpretation of the clause in the Pakistan–Swiss BIT which provided that either Contracting Party ‘shall constantly guarantee the observance of the commitments it has entered into with respect to investments of the investors’ of the other party. The tribunal acknowledged that it was the first international tribunal to ‘examine the legal effect’ of such a clause.18 It rejected the claimant’s submission that the meaning of the clause was to take breaches of contract under municipal law and elevate them to breaches of an international treaty. On looking to the ‘object and purpose’ of the treaty the tribunal could find no evidence to sustain SGS’s approach. In fact, the legal consequences of such an application of Article 11 of the BIT ‘are so far-reaching in scope, and so automatic and unqualified and sweeping in their operation, so burdensome in their potential impact upon a Contracting Party, we believe that clear and convincing evidence must be adduced by the Claimant’.19 (p. 208) To adopt what the claimant itself referred to as a ‘far-reaching’ application of the clause would mean that an unlimited number of contracts would fall within the protection of the treaty. The tribunal also noted that it would make some of the substantive protections of the treaty redundant and allow an investor to ‘at will, nullify any freely negotiated dispute settlement clause in a State contract’.20 To permit such an application would be contrary to the in dubio mitius principle in international law that favours the interpretation that defers to the sovereignty of the state.21

6.08  In contrast, the tribunal in SGS v Philippines22 reached a different conclusion less than six months later by adopting a broader, or perhaps more accurately an ‘operative’23 interpretation of the umbrella clause. Article X(2) of the Philippines–Switzerland BIT provides that: ‘Each Contracting State shall observe any obligation it has assumed with regard to specific investments in its territory by investors of the other Contracting Party.’ The tribunal noted the mandatory wording of the provision and concluded that the object and purpose of the BIT ‘supported an effective interpretation’ of this provision. The tribunal rejected the assertion of the Philippines that if the clause were to have substantive effect it should be limited to obligations arising under other international law instruments. This qualification could have been made expressly in the BIT.

6.09  The tribunal noted that the wording of the umbrella clause in the SGS v Pakistan case was less categoric and ‘formulated in different and rather vaguer terms than Article X(2)’. It went on to reject the four reasons relied on by the SGS v Pakistan tribunal for adopting a ‘highly restrictive’ interpretation of the umbrella clause.24 The SGS v Philippines tribunal did not accept that a broad interpretation would result in a ‘full-scale internationalization of domestic contracts’. This is not what the umbrella clause in the BIT does. ‘It does not convert non-binding domestic blandishments into binding international obligations. It does not convert questions of contract law into questions of treaty law. In particular it does not change the proper law of the CISS Agreement from the law of the Philippines to international law. Article X(2) addresses not the scope of the commitments entered into with regard to specific investments but the performance of these obligations, once they are ascertained’.25 (p. 209) Essentially it makes the observation of the contract an obligation under the treaty. The umbrella clause ‘makes it a breach of the BIT for the host State to fail to observe binding commitments, including contractual commitments, which it has assumed with regard to specific investments’.26 The obligation in SGS v Philippines was to pay the sums due under the contract. However, the tribunal did not go so far as to determine the scope of those obligations as that was still governed by the contract. The tribunal distinguished between the scope and actual performance of the contractual obligations. In addition, the umbrella clause did not override the exclusive forum selection clause in the contract. An umbrella clause provides ‘or at least may provide, a basis for a treaty claim even if the BIT in question contains no generic claims clause’.27 The tribunal therefore suspended the proceedings pending determination of the sums payable by the courts of the Philippines, the forum agreed in the contract.28 This outcome was criticized by a later tribunal that felt that ‘quite contradictory conclusions have been drawn by the Tribunal in SGS v Philippines case’.29

6.10  It has been observed that the two tribunals reached the same outcome by using entirely different reasonin; in both cases the tribunal refused to consider the contractual breach remitting the dispute to the contractual forum. It was the manner in which the tribunals reached their conclusion that differed, creating uncertainty about the scope of the umbrella clause. The tribunal in SGS v Pakistan accepted that states could agree in a BIT that ‘all breaches of each State’s contracts with investors of the other State are forthwith converted into and to be treated as breaches of the BIT. What the Tribunal is stressing is that in this case, there is no clear and persuasive evidence that such was in fact the intention of both Switzerland and Pakistan in adopting Article 11 of the BIT.’30 So even though it applied a restrictive interpretation it left open the possibility that should sufficient evidence be forthcoming it could reach a different conclusion.31

(p. 210) After the SGS Cases

6.11  The reasoning in the SGS awards has been applied in subsequent cases with varying results: some cases have followed the narrower SGS v Pakistan approach32 while others have favoured the wider SGS v Philippines reasoning.33 The Joy Mining decision contributed to the debate over the precise meaning of the umbrella clause. The tribunal seemed to suggest that the prominence of the clause in the BIT would affect its meaning. It rejected the SGS v Philippines finding that such clauses elevate all contract breaches to treaty breaches. According to obiter statements made by the Joy Mining tribunal, it could not be held ‘that an umbrella clause inserted in the Treaty, and not very prominently, could have the effect of transforming all contract disputes into investment disputes under the Treaty, unless of course there would be a clear violation of the Treaty rights and obligations or a violation of contract rights of such a magnitude as to trigger the Treaty protection, which is not the case’.34 There was no connection between the contract and the treaty which prevented any such effect. The tribunal did acknowledge that such a link may be found in a different case. In Salini v Jordan the tribunal emphasized the importance of the wording of the particular clause. It noted that the umbrella clause in the Italy–Jordan BIT was ‘couched in terms that are appreciably different from the provision applied’ in the SGS cases.35 The specific umbrella clause provided only that the parties would create and maintain ‘a legal framework apt to guarantee to investors the continuity of legal treatment … of all undertakings assumed with regard to each specific investor’.36 There was therefore no requirement to observe any obligations assumed as in SGS v Philippines, nor did it even (p. 211) guarantee the observance of such commitments as in SGS v Pakistan. The tribunal declined jurisdiction over the claimant’s purely contractual claims.

6.12  In contrast the tribunal in Eureko applied the SGS v Philippines approach and went on to determine the actual content and scope of the obligations under the First Addendum. The Eureko tribunal confirmed that to give an effective meaning to the umbrella provision it ‘had to mean something in itself’ and endorsed the analysis of the SGS v Philippines tribunal as ‘cogent and convincing’. It concluded that the actions of Poland that were in breach of the fair and equitable treatment standard and expropriatory in effect were ‘also in breach of its commitments under Article 3.5 of the Treaty to ‘observe any obligations it may have entered into with regards to investments of investors’ of the Netherlands’.37 The tribunal made no distinction between scope and performance of an obligation under the contract. In Noble Ventures v Romania the tribunal reviewed the case law and concluded that an umbrella clause is ‘usually seen as transforming municipal law obligations into obligations directly cognizable in international law’.38 It did not find it necessary to circumscribe the exact scope of the provision and made no definitive conclusions on whether the clause ‘perfectly assimilates to breach of the BIT any breach by a host State of any contractual obligation’.39 The tribunal did consider that the clause covered investment contracts only as the ‘employment of the notion ‘entered into’ indicates that specific commitments are referred to and not general commitments, for example by way of legislative acts’.40

6.13  In the CMS v Argentina award the tribunal confirmed that not all contract breaches amount to treaty breaches and this has been confirmed in the recent jurisprudence. It observed that ‘purely commercial aspects of a contract might not be protected by the treaty in some situations, but the protection is likely to be available when there is significant interference by governments or public agencies with the rights of the investor’ (emphasis added).41 This qualitative test has been criticized on the basis that it ‘is capable of producing arbitrary results’.42 The tribunal in CMS (p. 212) concluded that Argentina had in fact breached the umbrella clause by failing to comply with the terms of the licence granted to TGN (Transportadora de Gas del Norte).43 This was the first time an umbrella clause had been invoked by an investor successfully. The conclusion was a point of dissension by the ad hoc committee which annulled the tribunal’s finding. The reasons are discussed further below.

6.14  In another award involving Argentina, the tribunal considered the same umbrella clause in Article II(2)(c) of the Argentina–US BIT which provides that each ‘party shall observe any obligation it may have entered into with regard to investments’. The tribunal in LG&E confirmed that this created a requirement for the host state to ‘meet its obligations towards foreign investors, including those that derive from a contract’.44 To determine the applicability of the umbrella clause the tribunal had to establish whether Argentina had assumed international obligations with respect to LG&E by virtue of the Gas Laws. It concluded that the laws and regulations became obligations within the meaning of Article II(2)(c) ‘by virtue of targeting foreign investors and applying specifically to their investments, that gave rise to liability under the umbrella clause’.45 This was the first case where a tribunal expressly accepted that the obligations of the municipal law, including guaranteeing payment in pesos, was covered by the umbrella clause.46 The idea that an umbrella provision could in some way impact the host state’s sovereignty has been questioned as ‘it is a confusion to equate a State law or regulation with an obligation entered into by the State, or to regard an umbrella clause as implicitly freezing the laws of the State as at the date of admission of an investment’.47

6.15  The approach in LG&E is a vastly different interpretation of the same provision in the Argentina–US BIT reached by other tribunals. In the El Paso and Pan American cases a restrictive approach was adopted by the tribunals and they refused (p. 213) to accept that the umbrella clause elevated or ‘internationalized’ all municipal law commitments.48 Other tribunals, for example Sempra v Argentina, have also taken a less restrictive view. The tribunal in that case acknowledged that the contractual claims also amounted to treaty claims as the BIT included ‘the specific guarantee of a general ‘umbrella clause’, such as that of Article II(2)(c), involving the obligation to observe contractual commitments concerning the investment’.49 This created an even closer link between the contract, the context within which the investment was made, and the BIT.

6.16  In Siemens v Argentina, Argentina argued, as it had done in Azurix,50 that the umbrella clause in the Argentina–US BIT applied only to investment agreements and not to a breach of a concession agreement governed by the domestic and administrative law agreed in the forum selection clause. ‘Siemens intentionally confuses the Investment Agreement with the investment, terms that are not equivalent and cannot be merged’. The tribunal rejected this distinction. Such a distinction was not included in the umbrella clause which referred to ‘any obligations’. The tribunal confirmed that any ‘agreement related to an investment that qualifies as such under the Treaty would be part of the obligations covered under the umbrella clause’.51 As such any binding commitment entered into by Argentina in respect of an investment would be covered by the clause.

6.17  The difficulty in deciding how the umbrella clause should be applied was well captured by the tribunal in PSEG v Turkey52 where it commented that ‘a number of recent awards have extensively discussed the meaning of the ‘umbrella clause’ and there is no point for this Tribunal to go over this discussion again. In the context of the present dispute, it suffices to note that there are different views about whether a contract breach can be transformed into a treaty breach or should be handled differently as an ordinary commercial breach of contract’.53 As the tribunal did not find a specific breach of obligations under the contract, the question did not arise in that case.

(p. 214) Treaty Claims v Contract Claims

6.18  The application of the umbrella clause is intrinsically linked to the fundamental principle that a state is not responsible under international law for a breach of contract unless ‘the breach is not a simple breach’ and ‘involves an obviously arbitrary or tortuous element’.54 It is accepted that breach of contract claims is legally distinct from treaty claims.55 The significance of this distinction and the implications of a forum selection clause in a contract have been extensively considered.56 This position has been reaffirmed in more recent jurisprudence with Lanco, Vivendi, and Bayindir v Pakistan.57 In the Azurix case the claimant submitted that it could choose between the dispute-resolution provisions in the Concession contract and those available under the BIT by virtue of the observance of obligations provision in the umbrella clause. Argentina ‘recalls the findings of the PCIJ in Serbian Loans, the ICJ in ELSI, the arbitral tribunal in Woodruff, the ad hoc Annulment Committee in Vivendi, and the arbitral tribunals in the SGS cases, and concludes that general international law bluntly separates contractual claims from those under international law, that even in the case of BITs the prohibition to transubstantiate a contractual claim into a BIT claim remains, and that when a tribunal has established conditions for the application of an umbrella clause it has required the claimant to abide by the contract forum clause’.58 The tribunal did not consider the matter as it determined that none of the contracts was between the actual parties to the arbitration and even if ‘it would be possible under Article II(2)(c)59 to hold (p. 215) Argentina responsible for the alleged breaches of the Concession Agreement by the Province, it was ABA and not Azurix which was the party to this Agreement’.60

6.19  The umbrella clause is therefore an ‘exception to the general separation of States’ obligations under municipal and under international law’.61 This starting position impacts the application of the umbrella clause. Even if the particular umbrella clause does elevate the breach to a treaty breach, the international rules of attribution do not apply to contract claims. This was made clear by the ad hoc committee in the Vivendi annulment proceedings. It confirmed that it was a general principle of international law that a breach of the BIT and a breach of contract were different questions.

Each of these claims will be determined by reference to its own proper or applicable law—in the case of the BIT, by international law; in the case of the Concession Contract, by the proper law of the contract, in other words, the law of Tucumán. For example, in the case of a claim based on a treaty, international law rules of attribution apply, with the result that the state of Argentina is internationally responsible for the acts of its provincial authorities. By contrast, the state of Argentina is not liable for the performance of contracts entered into by Tucumán, which possesses separate legal personality under its own law and is responsible for the performance of its own contracts.62

6.20  In recent commentary on the Vivendi award, it was noted that the ad hoc committee ‘agreed with the Tribunal on the question of attribution. The effect is that a treaty claim against a component state or province within a federation does not require designation under Article 25(1) and (3) of the ICSID Convention, but a contract claim does. This is because under international law the State is responsible for internationally wrongful acts of subordinate bodies, whereas this is not true for domestic law contracts’.63 The tribunals in Impregilo v Pakistan and Salini v Morocco reached the same conclusion. In the latter case the tribunal confirmed that the dispute-resolution clause in the BIT ‘compels the State to respect the jurisdiction offer in relation to violations of the Bilateral Treaty and any breach of a contract that binds the State directly’. It does not ‘extend to breaches of contract to which an entity other than the State is a named party’.64 In Impregilo, WAPDA, an independent state entity, had entered into the contract with the investor. The tribunal confirmed that the treaty and contract claims remained distinct ‘because of the different rules of attribution that govern responsibility for the performance (p. 216) of BIT obligations, as opposed to responsibility for breaches of municipal law contracts’.65 A tribunal asked to apply an umbrella clause will have to determine not just whether the breach of contract is covered under the particular clause but whether the principles of state responsibility are also satisfied before any such breach will be attributable to the state.

CMS v Argentina Annulment

6.21  The pivotal decision of the ad hoc committee in the CMS v Argentina case brings together these two elements: the treaty v contract distinction and the scope of application of the umbrella clause. Argentina sought to have the award annulled on various grounds, including that the tribunal had manifestly exceeded its power in finding a breach of the umbrella clause in the treaty.66 Argentina argued that it had assumed no obligation in respect of CMS. In contrast, CMS invoked a broad interpretation of Article II(2)(c), claiming that the obligations under the licence related to an investment for the purpose of that provision. Although as a minority shareholder CMS could not invoke such rights under Argentinean law, the umbrella clause gave it standing to do so under the BIT. This broad interpretation proved problematic for the ad hoc committee in many respects. The decision reads in pertinent part:

  1. (a)  In speaking of ‘any obligations it may have entered into with regard to investments’, it seems clear that Article II(2)(c) is concerned with consensual obligations arising independently of the BIT itself (i.e. under the law of the host State or possibly under international law). Further they must be specific obligations concerning the investment. They do not cover general requirements imposed by the law of the host State.

  2. (b)  Consensual obligations are not entered into erga omnes but with regard to particular persons. Similarly the performance of such obligations or requirements occurs with regard to, and as between, obligor and obligee.

  3. (c)  The effect of the umbrella clause is not to transform the obligation which is relied on into something else; the content of the obligation is unaffected, as is its proper law. If this is so, it would appear that the parties to the obligation (i.e., the persons bound by it and entitled to rely on it) are likewise not changed by reason of the umbrella clause.

  4. (d)  The obligation of the State covered by Article II(2)(c) will often be a bilateral obligation, or will be intrinsically linked to obligations of the investment company. Yet a shareholder, though apparently entitled to enforce the company’s rights in its own interest, will not be bound by the company’s obligations, e.g. as to dispute settlement.

  5. (p. 217)
  6. (e)  If the Tribunal’s implicit interpretation is right, then the mechanism in Article 25 (2)(b) of the ICSID Convention is unnecessary wherever there is an umbrella clause.

  7. (f)  There is no discussion in the award of the travaux of the BIT on this point, or of the prior understandings of the proponents of the umbrella clause as to its function.67

6.22  In essence the ad hoc committee could not see how the tribunal arrived at its conclusion that CMS could in fact invoke Argentina’s obligations to TGN. The tribunal referred to the respondent’s submission that CMS had no standing under the licence as any commitments assumed were only for TGN. However, no discussion on how or why this point was resolved appeared in the merits award. In fact, the tribunal said it would not deal with the jurisdictional aspects as it had done so in its decision on jurisdiction.68 No such specific discussion took place in the earlier jurisdiction award. The ad hoc committee concluded that as a result there was a ‘significant lacuna in the Award’.69 The tribunal noted that as it found that there were insufficient reasons given on how the tribunal reached its finding on the umbrella clause it did not need to consider the manifest excess of power argument. This decision has done much to settle certain points on the application of the umbrella clause. It confirms the views in certain earlier awards such as Azurix and Siemens referred to above. The claimants were not parties to the agreement containing the obligations and under the applicable law – Argentinean Law – CMS was not entitled to pursue any remedies on behalf of TGN. This situation was not changed by the umbrella clause which at most is ‘an extra mechanism for the enforcement of claims, but the basis of the transaction remains the same’.70 Although some commentators found it strange that the ad hoc committee did not refer to the LG&E award that reached the same conclusion in the same circumstances, i.e. the parent holding company taking the claim rather than the local entity,71 it would have been difficult to extend its remit to do so. An ad hoc committee is constituted to consider only the elements of the award before it and cannot include comment on other awards, even if made in similar circumstances.

(p. 218) Summary

6.23  The divergent approaches adopted by international tribunals to the exact scope of application of these clauses highlight the difficulty and uncertainty that these provisions cause. The different interpretation given to the same provision in the Argentina–US BIT is clear evidence of this. It cannot be assumed that an umbrella clause will elevate contract breaches to breaches of the BIT at the international level. These subtleties and distinctions were identified and set out in an erudite fashion by Professor Crawford in the Freshfields lecture in November 2007 where he concluded that treaty and contracts rights are different things yet they are part of the ‘same one world with many legal systems that international arbitrators have long inhabited’.72 A BIT provides an ‘additional layer of protection …’ for an investment but ‘the BIT should not be used as a vehicle to rewrite the investment arrangement’.73

6.24  It is clear that the wording of the particular provision will have a bearing on the outcome of the case. The decisions in the SGS cases, issued within six months of each other, are testament to the importance of the exact language of the clause.74 The OECD report on the Interpretation of Umbrella Clauses in Investment Agreements concluded that the ‘proper interpretation of the clause depends on the specific wording of the particular treaty, its ordinary meaning, context, the object and purpose of the treaty as well as negotiating history or other indications of the parties intent’.75 This will have, as discussed below, implications for the Chinese BITs that fall outside the standard form of umbrella clause.

6.25  The umbrella clause does not eliminate the contract claim; it continues to exist alongside the treaty claim. Thus any express choice of forum in the contract remains in place. In fact, many of the tribunals when considering the scope of the umbrella clause expressed concern that an investor could renege on the contractual forum selection clause and choose the BIT dispute option by relying on the umbrella clause.76 A foreign investor must be aware that it may not be able to circumvent the jurisdiction clause in the contract. As in SGS v Philippines, the scope and content of the obligations may end up being determined by whatever forum had been agreed.

6.26  Moreover, it is submitted that purely commercial contracts should not be covered. However, obligations assumed by the state as sovereign will. This view finds support (p. 219) by both eminent scholars and jurisprudence of investment arbitration tribunals. Brower, for instance, commented that umbrella clauses should only apply ‘specifically to large-scale investment and concession contracts – in the making of which the state is deliberately ‘exercising its sovereignty’– and thus it might be argued that the ordinary commercial contracts are an implied exception to the general rule’(emphasis added).77 This distinction between sovereign contracts and normal commercial contracts was noted as generally accepted by Judge Schwebel who confirmed that a ‘state is only directly responsible on the international plane, for acts involving breaches of contract, where the breach is not a simple breach …’.78 Wälde is also of the view that the BIT and umbrella clause ‘has no role’ in case of ‘normal’ contract disputes, i.e. ‘[I]f the core or centre of gravity of a dispute is not about the exercise of governmental powers … but about ‘normal’ contract disputes’.79 The two SGS tribunals also declined to exercise jurisdiction in the cases, mainly on the ground that the disputes were based essentially on a commercial contract, which gave local courts exclusive jurisdiction.80 In El Paso v Argentina the tribunal concluded that:

‘In view of the necessity to distinguish the State as a merchant, especially when it acts through instrumentalities, from the State as a sovereign, the Tribunal considers that the ‘umbrella clause’ in the Argentine-US BIT … can be interpreted in the light of Article VII(1) which clearly includes among the investment disputes under the Treaty all disputes resulting from a violation of a commitment given by the State as a sovereign State, either through an agreement, an authorization, or the BIT … Interpreted in this way, the umbrella clause… read in conjunction with Article VII, will not extend the Treaty protection to breaches of an ordinary commercial contract entered into by the State or a State-owned entity, but will cover additional investment protections contractually agreed by the State as a sovereign – such as a stabilization clause – inserted in an investment agreement.’81 (emphasis added).

(p. 220) 6.27  It is not the function of the umbrella clause to turn minor disagreements under a contract into a breach under international law. Clearly treaty provisions may be invoked only where there is a ‘specific breach of rights and violation of contract rights protected under the treaty’.82 Several requirements must be fulfilled before an umbrella clause might be invoked: there must be an investment, the state must have assumed a commitment or legal obligation towards that specific investment, and the investor must have relied on those commitments in making or continuing its investment. In addition, the claimant must have the capacity to invoke the obligations assumed under the applicable law. If this is lacking, a BIT cannot be used to avoid the provisions of the contract, including applicable law and any forum selection provision. It is therefore submitted that a standard umbrella clause should apply only to specific commitments and not to laws of general application.83 The tribunal in LG&E did not analyse in any detail the fact that the obligation assumed ‘must have been assumed vis-à-vis the specific investment – not as a matter of the application of some legal obligation of a general character’.84 This is a key issue in applying the umbrella clause as the Gas Law may not have been covered if it did not target a ‘specific investment’. This distinction would, correctly, preclude most municipal legislation from being covered by the umbrella clause.85

(p. 221) C.  Umbrella Clause in Chinese BITs

6.28  Among China’s 120-strong BITs, fewer than half of them (50) have an umbrella clause.86 This percentage is similar to the result of a survey on general BITs, which revealed that only about 40% of the BITs had such a clause.87 The following section examines the main variants of these clauses in Chinese BITs, including the standard and non-standard (broader or narrower) formulations, and their interaction with other BIT provisions such as ‘preservation of rights’ clauses and the most-favoured-nation clause.

The Standard Formulation

6.29  The standard formulation of umbrella clause in Chinese BITs88 follows the European model.89 A typical clause can be found, for example, in Article 2(2) of the UK BIT, which states:

Each Contracting Party shall observe any obligation it may have entered into with regard to investments of nationals or companies of the other Contracting Party.90

6.30  This is almost identical to the umbrella clause considered by the tribunal in SGS v Philippines. Thus it is more than likely that a tribunal could find it had jurisdiction to consider a breach under its terms, although much would depend on any pre-existing contractual dispute-resolution option and the proper law of contract.

‘Shall Observe’ v ‘Shall Guarantee the Observance’

6.31  In most Chinese BITs that contain an umbrella clause, the language used includes ‘shall observe’ or ‘shall respect’, suggesting the imposition of a mandatory (p. 222) legal obligation. However, some BITs have incorporated less categorical language. The umbrella clause of the Swiss BIT, for instance, requires that:

6.32  Chaque Partie Contractante assure à tout moment le respect des engagements assumés par elle à l’égard des investissements des investisseurs de l’autre Partie Contractante.91

6.33  This formulation is the same as Article 11 of the Swiss–Pakistan BIT,92 which was considered by the SGS v Philippines tribunal as ‘different and rather vaguer’ than that in Article X(2) of the Swiss–Philippines BIT,93 which resembles the standard Chinese BIT formulation. Some commentators also consider such wording to be ‘less clear and categorical’94 or ‘more ambiguous and may leave room for different interpretation’.95 However, no one seems to have gone further to explore the exact differences between these two formulations. One way to appreciate the difference might be that under the standard formulation, a state concerned has to perform the obligation whilst under the ‘guarantee the observance’ formulation, a state, although still having to perform the obligation, has the discretion of choosing the particular measures to perform it. This difference may be most significant when the obligation concerned is of a general or abstract nature.

6.34  The same analysis applies to Article 10 of the Iran BIT:

Either Contracting Party shall guarantee the observance of the commitments it has entered into with respects to investments of investors of the other Contracting Party.

6.35  This umbrella provision is similar to that in the Swiss BIT, but has omitted the word ‘constantly’ before ‘guarantee the observance’ and is therefore even weaker than the latter. In this regard, it is interesting to recall Lowe’s question: ‘What would an inconstant guarantee amount to’?96 One answer might be that, in times of national emergency or great economic, political, and social disturbance, observance of such commitments might be waived.

(p. 223) ‘Any Obligation/Commitments’ v ‘Commitments’

6.36  With regard to the scope of application, most Chinese BITs use very broad phrases such as ‘any obligation’, ‘any commitment(s)’, or ‘any other obligation’. Such phrases suggest a broader coverage of State undertakings. In the Partial Award rendered in Eureko v Poland, the tribunal held that ‘“[A]ny” obligations is capacious; it means not only obligations of a certain type, but “any” – that is to say, all – obligations’.97 Likewise, the tribunal in the SGS v Philippines case considered that the phrase ‘any obligation it has assumed with regard to specific investments in its territory’ in Article X(2) of the Swiss–Philippines BIT was clearer and more categoric than the umbrella clause in the Swiss–Pakistan BIT.98 Article 11 of that BIT obliged the Contracting Parties to observe ‘the commitments it has entered into with respect to the investments’. It is clear from the review of recent cases above that this subtle distinction in language has an impact on how the umbrella clause is applied. This is true despite some tribunals’ misgivings that the umbrella clauses ‘analysed so far really should receive different interpretations’.99 As China has adopted the more onerous wording in most of its BITs it is likely that any future claim by an investor based on the standard umbrella clause will result in a similar outcome to SGS v Philippines. The outcome will depend on the type of investment contract involved and, if the umbrella clause is being applied as a substantive right, the degree of state involvement and to whom the obligations are owed after the CMS annulment decision.

‘Entered into’ v ‘Assumed’

6.37  Whilst most Chinese BITs refer to obligations ‘entered into’ by a state, some refer to obligations ‘assumed’100 by the state. The Australia BIT refers to ‘undertakings given by a competent authority’.101 Although it has been argued that the phrase ‘obligations entered into’ may be interpreted as limiting the obligations in question to those undertaken vis-à-vis the other Contracting Party,102 this view can hardly be sustained given that most umbrella clauses, including those in Chinese BITs, (p. 224) directly refer to obligations entered into by the State ‘with regard to investments of nationals or companies of the other Contracting Party’.103 Indeed, the Tribunal in SGS v Pakistan found the language ‘commitments entered into’ broad enough to encompass both contractual obligations and unilateral obligations, including municipal acts and administrative measures.104 The use of ‘entered into’, however, suggests that only ‘specific commitments’, rather than general commitments, may be covered by the clause, as observed by the Noble Ventures, Inc v Romania Tribunal.105 On the other hand, terms such as ‘assumed’ or ‘given’ by a state or its competent authorities indicate a broader coverage embracing general commitments, for example in the form of legislative acts.

Non-standard Formulations

Narrower Formations

6.38  Whilst most BITs adopted by China include the standard format, a considerable number of them adopt a narrower formulation by imposing substantive limitations on the scope of application of the umbrella clause. There are five main categories of restrictive formulations, imposing restrictions such as ‘subject to local laws’, ‘written obligation’, ‘specific commitments’, ‘contractual obligation’ concerning ‘approved investments’, and ‘approved investment contracts’ and ‘documents of approval’. Details of these more restrictive formulations follow.

‘Subject to Local Laws’

6.39  The first type of restriction imposed in several BITs makes the obligations or commitments subject to the laws of the host state. The Belgium–Luxembourg BIT immediately after a standard umbrella clause in Article 9 adds that:

The above special contracts or obligations shall be in conformity with the laws of the Contracting Parties accepting the investment and the provisions of this agreement.

6.40  Similar ‘domestic law’ limitations can be found in the Thailand BIT106 and the Australia BIT.107 This restriction in an umbrella clause has not yet been considered by a tribunal although it has been the focus of several awards where jurisdiction was denied as the investment had not been made in compliance with the local law. (p. 225) There have been several cases where tribunals considered the requirement that an investment be made in accordance with local laws.108 One of the first cases where jurisdiction was refused because the investment had been made in violation of the local law and contrary to good faith was in Fraport v Philippines. The respondent state successfully argued that the investor’s failure to comply with the local law meant that the investment had not been ‘accepted’ in accordance with the laws of the Philippines. The BIT was of a limited nature given the wording used in the definition of investment in Article 1(1) of the Germany–Philippines BIT. The tribunal confirmed that ‘considerable arguments may be made in favour of construing jurisdiction ratione materiae in a more liberal way which is generous to the investor’.109 Fraport was found to have intentionally violated the local law and could not benefit from such assumptions. BITs oblige governments to ‘conduct their relations with foreign investors in a transparent fashion’ but some reciprocal if not identical obligations lie on the foreign investor. One of those is the obligation to make the investment in accordance with the hosts state’s law’.110 The tribunal concluded that the language of the BIT was ‘dispositive’ and ‘unequivocal’ on this point. To extrapolate the reasoning of the tribunal to the language used in the Chinese umbrella clause would seem to impose a similar obligation of compliance. Failure to ensure that an investment made in China was in compliance with the local law and accepted as such by China would result in the same outcome for a disappointed investor.

6.41  The old Germany BIT is special in this context in that although it does not generally subject the umbrella clause to domestic law it guarantees that ‘the right of each Contracting Party to amend its general law shall remain unaffected’.111 The Thailand BIT not only subjects such obligation to the domestic law of the host state but also requires that, in the event of any change of such laws of one Contracting Party, investors from the other Contracting Party ‘shall observe the new laws’, but the former Contracting Party ‘shall make responsible arrangements for the appropriate interest’ of the investors.112 These BITs therefore make clear that host states are not precluded by the BITs from laying down new laws and (p. 226) regulations on foreign investment, although under the Thailand BIT, appropriate measures of adjustment must be made. However tempting, it would be a step too far to argue that without such an express statement, host states would be prohibited from passing new laws, particularly those of general applicability rather than targeted specifically at certain investors or investment.113 Making laws is an essential function of any government. As such it would be unthinkable that a BIT provision could deprive a sovereign government of this right altogether. It is not inconceivable that certain laws of general application might have a significant impact on certain investors and as such might give rise to the protection under the umbrella clause. For example, the LG&E tribunal held that for the investment of the LG&E, the Gas Law and its regulations were not law of general nature but were ‘very specific in relation to LG&E’s investment in Argentina, so that their violation would be a violation of the umbrella clause’.114

‘Written Obligation’

6.42  A second substantive qualification on the umbrella clause ‘obligation’ requires that protected undertakings be in ‘written’ form. In this regard, the only example seems to be the Australia BIT, which stipulates:

A Contracting Party shall, subject to its law, adhere to any written undertakings given by a competent authority to a national of the other Contracting Party with regard to an investment in accordance with its law and the provisions of this agreement. (emphasis added)115

6.43  The intention of this qualification is obviously to exclude any obligation that may be granted in forms other than a written document, for example an oral promise. It is observed that some other Australian BITs116 and a number of Mexican BITs117 also have this requirement. Although there has been no case law on this type of restriction it is clearly designed to limit the application of the umbrella clause to written contractual obligations. This may not be sufficient to cover promises made in an informal letter to an investor.

(p. 227) ‘Specific Commitments’

6.44  Some BITs require contracting parties to observe only ‘specific commitments’. As discussed, a proper construction of an umbrella clause probably should confine its application to specific obligations/commitments, rather than extending it to obligations/commitments of a general nature.118 The inclusion in a BIT of this more restrictive formulation, however, has the merit of clarifying its scope and as such preventing the adoption of a broader interpretation approach. This qualification appeared in the Philippines–Swiss BIT considered in SGS v Philippines. Although the award does not consider the actual intention of the term ‘specific investments’, it is clear that it must relate to a particular investment that qualifies under the definition in the BIT.

‘Approved Contractual Obligation’

6.45  The Austria BIT119 and the Jordan BIT120 have a special qualification on the ‘obligation’, which confines it to ‘any contractual obligations’ with regard to investments ‘approved’ by the host state. This wording would exclude any non-contractual obligation and any contractual obligation relating to an investment that has not been properly ‘approved’ by the host state. This restriction would clearly have to be interpreted by a tribunal in a more conservative manner than, for example, the reference to ‘any obligation’ in the Argentina–US BIT considered by the tribunal in Enron v Argentina. There the tribunal confirmed that given its ordinary meaning this phrase ‘refers to obligations regardless of their nature. Tribunals interpreting this expression have found it to cover both contractual obligations such as payment as well as obligations assumed through law or regulation’.121 A tribunal interpreting the more restrictive ‘approved contractual obligation’ language and adopting the ordinary meaning would necessarily have to limit the scope of this umbrella clause. Any unilateral measures by the host state that might give rise to its obligation towards foreign investors, such as a piece of legislation providing certain incentives (p. 228) or guarantees for investments or a letter of guarantee from the government, fall outside the reach of this clause. Only contractual obligations, such as concession agreements, which are approved by the host state, are protected by this umbrella clause. Investors in China must often ensure the approval of the relevant authority. Failure to do so would under the BITs with this restriction preclude reliance on the umbrella clause.

‘Document of Investment Approval’

6.46  The fifth and last substantive limitation on the ‘obligation’ to be upheld by the State can be found in the Kuwait122 and the United Arab Emirates BITs.123 Like the Austria BIT and the Jordan BIT, these two BITs link the umbrella clause to the approval of the investment project. However, they do not limit the obligation covered by the umbrella clause only to that based on ‘approved investment contracts’, but extend it to cover any obligation that may be included in the ‘document of approval of investments’. What such ‘approved investment contracts’ and ‘approval documents’ are remains unclear and yet to be tested. However, when necessary the definitions of ‘investment authorization’ and ‘investment contract’ in the Model US BIT might be useful references.124 Further discussion on the general legal effect of investment approval can be found in Section 6.63 and below.

‘Whether General or Specific’

Broader Formulations

6.47  A few BITs take an expansive approach in the umbrella clause adopting a broader formulation. The New Zealand BIT, for instance, attempts to do so by bringing ‘any obligations, whether general or specific’ under this protection. It appears that (p. 229) legislation of general applicability would be covered by such a clause. However, since it is yet to be tested in any case, it is unclear whether and to what extent the addition of ‘whether general or specific’ would affect the exact scope of application of the clause. Although both tribunals in the SGS cases considered in detail the specific wording of the umbrella clauses, neither of the provisions in the BITs include this language. However, it is clear that since the SGS cases tribunals have been prepared to give an expansive meaning to the term ‘any obligation’ which may make this additional reference less dramatic in effect.125

‘Private–private commitments’

6.48  Another type of expansionary umbrella clause is where it covers not only investor–state contracts but also contracts between foreign investors and domestic private parties.126 The Singapore BIT, for example, stipulates that:

Each Contracting Party shall observe any commitment in accordance with its laws additional to those specified in this agreement entered into by the Contracting Party, its nationals or companies with nationals or companies of the other Contracting Party as regards their investment.127 (emphasis added).

6.49  At first reading the provision looks rather strange, if not absurd: whilst it is easy to understand that a host state should observe any commitment it entered into with private parties of the other Contracting Party, it seems excessive to require it to likewise ‘observe’ ‘any commitment’ entered into between two private parties without any particular involvement of the host state. A requirement of the host state to respect the freedom of contract and to refrain from interfering with the contractual relationship between two private parties of the two contracting parties might be what was contemplated under such a clause. This seems to have been confirmed by a similar (but clearer) provision included again by Singapore, but ten years later with the Czech Republic, which reads:

(2)  Each Contracting Party shall observe commitments, additional to those specified in this Agreement it has entered in to with respect to investments of the investors of the other Contracting Party. Each Contracting Party shall not interfere with any commitments, additional to those specified in this Agreement, entered into by nationals or companies with the nationals or companies of the other Contracting Party as regards their investments. (emphasis added).

6.50  This BIT thus separates the host state’s obligation under a typical umbrella clause from its obligation vis-à-vis a private–private contractual relationship, which is (p. 230) not to interfere therewith. In a way, it might be regarded as a remote echo to Wälde’s viewpoint128 and the CMS v Argentina award,129 which require the host state not only to observe the obligations and commitments it has specifically undertaken towards investments but also to respect the freedom of contract and not substantially interfere with the rights of foreign investors in an investment contract. It remains to be seen what the exact legal effect of this provision would be, in particular whether any breach of the second obligation relating to private parties would give rise to a treaty breach.

Interaction with Other Relevant BIT Provisions

‘Preservation of Rights’ Clause

6.51  In addition to the 50 Chinese BITs that contain an umbrella clause, there are six BITs that contain a ‘preservation of rights’ clause. These clauses have a similar effect to an umbrella clause.130 Among them, the France BIT is unique in that it is targeted only to special commitments given by the host state. More specifically, it stipulates that if an investment is made in accordance with a special commitment made by the host government, and the special commitment is more favourable than treatment under the present BIT, then the investment should be treated in accordance with the conditions under the special commitment.131 Another five BITs deal with both ‘special commitments’ and domestic laws. A good example can be found in Article 10 of the Qatar BIT, which stipulates that:

If the treatment to be accorded by one Contracting Party in accordance with its laws and regulations or based on an undertaking or a special agreement to investors or activities associated with such investments of investors of the other investors of the other Contracting Party is more favourable than the treatment provided for in this agreement, the more favourable treatment shall be applicable.

6.52  Unlike the umbrella clauses, which address the issue (of assurance of special investment projects) from the perspective of the host state by forcing it to observe its obligations/commitments towards investments, these ‘preservation of rights’ clauses address the same issue from the angle of the foreign investors, by ensuring them the more favourable treatment under such special undertakings or commitments. In other words, both provisions serve the same aim, although the routes taken to achieve it are different. It is hard to assess which way is more effective. However, by directly comparing treatment under a special ‘undertaking or special commitments’ with that under an international treaty and placing the former in a (p. 231) prevailing position, the ‘preservation of right’ route seems to impose a stronger international obligation in the case of any breach of such standard of treatment. Yet the invocation of a ‘preservation of rights’ clause requires, as a precondition, the establishment of the fact that the treatment under such special undertakings or commitments is actually ‘more favourable’ than that provided for in the BIT or relevant domestic laws, which is not always an easy job.

6.53  There are another five BITs that provide for such ‘preservation of rights’ guarantee, in addition to a proper umbrella clause.132 The combined effect should further enhance the assurance that special commitments made to foreign investors by host governments would be effective under international law.

MFN Clause

6.54  As mentioned above, fewer than half of the Chinese BITs have an umbrella clause. This raises the question of whether an ‘umbrella clause’ can be ‘multiplied’ by applying the most-favoured-nation treatment clause. The interaction between the umbrella clause and the MFN clause is a very interesting topic, even though it is yet to be tested in practice. In Impregilo v Pakistan the investor argued that it could rely on the MFN to avail of the umbrella clause in another BIT. Pakistan was obliged ‘to extend this same Treaty protection of contractual commitments to Italian investors’.133 However, the tribunal refused to invoke the umbrella clause as the contract was between the investor and the Pakistan Water and Power Authority which had separate legal personality. The investor had tried to rely on the MFN provision to benefit from the umbrella clause. The tribunal said that even ‘assuming arguendo that Pakistan, through the MFN clause … has guaranteed the observance of the contractual commitments into which it has entered together with Italian investors, such a guarantee would not cover the present Contracts – since these are agreements into which it has not entered. On the contrary, the Contracts were concluded by a separate and distinct entity’.134 Although the tribunal held against the investor it did not rule out the possibility of being able to invoke the MFN provision to apply to umbrella clauses.

6.55  In the international investment treaty framework, the two clauses are distinctive in that both of them serve as leverage. The MFN clause is like a ‘multiplier’, in that it can extend rights in one BIT to other BITs entered into by the same state.135 Likewise, the umbrella clause is somehow like an ‘elevator’, as argued by SGS in (p. 232) its case against Pakistan,136 in that it ‘elevates’ obligations normally under domestic law and subject to domestic jurisdiction to the international legal plain and subject to international jurisdiction. Both mechanisms, the multiplier and the elevator, are understandably subject to qualifications and limitation,137 although the exact boundary of each is unclear.

6.56  One of the key current debates on MFN clauses is whether it should cover benefits resulting from procedural provisions, on which various tribunals have reached different or even conflicting interpretations. It is settled that substantive provisions under BITs are eligible to benefit from the MFN clause. It is thus necessary to ascertain whether an umbrella clause might be classified as a substantive provision. The tribunal in the SGS v Pakistan case arrived at a negative conclusion partly on the ground of the location in the BIT of the umbrella clause. It was located towards the end after the bulk of substantive provisions.138 In contrast, the tribunal in the SGS v Philippines case answered this question in the positive. It held that whilst the location of the clause is relevant, it is not decisive. Further, it stated:

In particular, it is difficult to accept that the same language in other Philippines BITs is legally operative, but that it is legally inoperative in the Swiss-Philippines BIT merely because of its location.

6.57  In this regard, it is interesting to discover that among the 50 Chinese BITs with umbrella clauses, 34 BITs place the clause towards the end of the text whilst only a small number of BITs (16) do so in the earlier part.139 The authors agree with the SGS v Philippines tribunal that whether or not an umbrella clause is substantive (p. 233) and therefore operative should not be decided by the mere fact of its location in the BIT text. As a result, one could not simply say that they should operate and can be multiplied in the first 34 BITs but not in the other 16 BITs. A better approach to this issue of interpretation is to leave it for the tribunal to decide ona case-by-case basis by taking into account the relevant circumstances, particularly the specific obligation/commitment at issue. In theory, an umbrella clause can cover both substantive and procedural obligation/commitments. Whether or not the clause is ‘substantive’ should therefore be judged on the particular obligation/commitment involved. If the obligation is of ‘substantive’ nature, e.g. a tax incentive, it can be multiplied by the operation of the MFN clause: if the obligation at issue is to do with ‘procedural/jurisdictional’ obligation, such as a wider range of choices of international arbitration, it may or may not be multiplied by employing the MFN clause.

Summary

6.58  Fewer than half of the Chinese BITs have an umbrella clause, the wording of which varies. Most Chinese BITs follow the standard formulation requiring the contracting parties to observe all obligations/commitments they have entered into/assumed against foreign investors, whilst others adopt either narrower or broader formulations.

6.59  The application of a standard umbrella clause in Chinese BITs will most likely result in a tribunal confirming that the latter type of contractual obligations can be elevated to the international plane to become a treaty breach. Such a breach is governed by international law rules, so if the action amounts to an international wrongful act and can be attributed to the state, liability can be sustained under the umbrella clause. If not, there is no recourse against the host state. What is harder to predict is whether a tribunal would adopt a similar approach to SGS v Philippines in staying proceedings pending resolution of the scope and extent of the contractual obligation or take a more robust view as endorsed by Eureko v Poland and the dissenting opinion in SGS v Philippines. This distinction between scope and performance of the contract will be particularly relevant for concession agreements in China where the forum selection clause often provides for the national courts, which will be discussed below.

6.60  The application of a non-standard formulation may generate different results, depending on the specific wording. For example, application of some of the most restrictive or qualified provisions (narrower formulations), such as the ‘subject to local law’ provisions, would probably result in a similar conclusion to Salini, (p. 234) entailing no hard obligation on the host state in this regard. In contrast, the broader formulation would probably require the host government to undertake more extensive obligations. Therefore, when the clause requires the observance of ‘any obligations, whether general or specific’, the host government would have to honour not only contractual commitments entered into with foreign investors but also general commitments untaken in the form of generally applied laws and regulations. If the host government is required to observe commitments entered into between local and foreign private parties, in addition to those directly assumed by the government, the government would probably be prohibited from interfering with such private–private contractual relations.

6.61  The interaction of the umbrella clause with other relevant BIT provisions, particularly the ‘preservation of rights’ clause and the MFN clause, is a very interesting and intellectually challenging question. The use of the MFN clause, although not yet specifically applied to cover an umbrella clause in investment treaty arbitration practice, has not been ruled out altogether. In the Impregilo v Pakistan case the possibility was not ruled out that an investor could invoke an umbrella clause by relying on an MFN.140 The ‘preservation of rights’ clause arguably has a stronger legal effect than the umbrella clause although invoking it might not be easy. The question of whether the umbrella clauses in Chinese BITs can be ‘multiplied’ by the application of the MFN clause in other Chinese BITs would be related to, if not dependent on, the answer to the question of whether an umbrella clause can be regarded as a ‘substantive’ provision. In this regard, it is submitted that the location of the umbrella clause within the BIT is unlikely to be decisive of its nature.

D.  Investment Contracts in China: State or Commercial Contracts?

6.62  As discussed above, investment contracts are the main targets of umbrella clauses. It is therefore useful to examine the main investment contracts in China, particularly whether they can be regarded as state contracts and therefore protected by the umbrella clauses. Investment contracts in China, depending on the level of (p. 235) involvement of the government authorities, can be categorized into three types, namely joint venture contracts, joint exploitation (of petroleum resources) contracts, and build-operate-transfer (BOT) contracts. The nature of these investment contracts is discussed below.

Joint Venture Contracts

6.63  In China JV investments141require a contract between the two JV partners.142 The content of JV contracts, together with the fact that both contracting parties are normally independent commercial entities rather than the government or its agencies, demonstrates that JV contracts are generally commercial contracts,143 not state contracts. In this connection, it is useful to recall the decisions in the Egypt v SPP case by two French courts, the Court of Appeal of Paris and the Court of Cassation, which set aside an award rendered by an International Chamber of Commerce (ICC) arbitration tribunal, on the ground that the Egyptian government was not a party to a contract between the claimant (SPP et al) and an Egyptian public company (the EGOTH), which included an arbitration clause submitting disputes to ICC arbitration tribunals.144 In reaching this conclusion, the Court of Appeal reasoned that, first of all, the ‘[E]gyptian State did not appear among the (p. 236) persons having the capacity of parties to the transaction and, consequently, was not bound by it’.145

6.64  However, there are three main complications that may arise. First, it is possible that some local JV partners may be state-owned enterprises (SOEs). Whilst most SOEs are independent commercial entities that do not exercise any governmental authorities, other SOEs may have been ‘empowered’ by domestic law to ‘exercise elements of governmental authority’.146 In the latter case, in light of the ILA State Responsibility Articles, the conduct of such SOE JV partners ‘shall be considered as an act of the State under international law,’ provided that they are ‘acting in that capacity in the particular instance’.147 Consequently, JV contracts between foreign investors and such SOE JV partners may be considered as ‘state contracts’ if they meet such conditions.148 These state contracts cover a wide range of areas such as ‘loan agreements, purchase contracts for supplies or services, contracts of employment, or large infrastructure projects, such as the construction of highways, ports or dams’.149 Typical state contracts falling into this category are China’s joint exploitation contracts with foreign enterprises examined below.

6.65  The second complication is that, as indicated above in chapter 1, Chinese laws require that all JV contracts, including any amendments thereto, be approved by (p. 237) the competent governmental authorities before they can take effect.150 Does such act of approval result in the Chinese government becoming a party to the contract and therefore the contract becoming a state contract?

6.66  The answer, although difficult to be equivocal, should be in the negative. This is because, first of all, the act of approval is a regular exercise of governmental authority. It is not intended to alter the specific terms and conditions under a JV contract, but to oversee such contracts, making sure that they are in line with the public interests. So long as the relevant government authority does not go beyond mere approval, it is unlikely to find itself a party to such purely commercial JVs. Clearly this will depend on the facts of a particular case and what action over and above the mere approval process the government entity carried out. In the aforementioned SPP v Egypt case, for example, the Court of Appeal of Paris considered the signature of the Minister of Tourism ‘approving, agreeing and ratifying’ the contract constituted ‘not a solemn commitment by the State to enter into the contract, but specifically the material manifestation of approval by the supervising authority’.151 A different conclusion could be reached if the signature went beyond mere approval and indicated an intention of the state parties to be legally bound by the contract. This would impact the investor’s chances of relying on an umbrella clause in an applicable BIT.

6.67  A closer examination of approval criteria under relevant Chinese laws confirms that the required approval is not intended to interfere with the freedom of contract of the parties but to exercise the supervisory power of the government. Whilst such laws do not specify the criteria against which a JV project is approved, they do provide for certain conditions under which a JV contract may not be approved. The Implementing Regulations of the EJV Law, therefore, stipulate that a JV project will not be approved if it is: (1) detrimental to Chinese State sovereignty, or (2) against Chinese law, or (3) incompatible with the needs of China’s national economic development, or (4) causing pollution to the environment, or (5) the agreement, contract and articles of association concluded are obviously (p. 238) unfair (Xianshi Gongping) and detrimental to the interests of one party.152 The Implementing Regulations of the CJVL have a similar provision, although it deleted the fifth condition and added to the list JV projects that are detrimental to public interests or state security.153 Apart from the fifth requirement, all of the conditions are clearly related to public interests rather than private interests of the contracting parties. Even the fifth condition could be considered a public-interest condition, because it is aimed at ensuring the balance of interests between the contracting parties, and hence achieving the public policy of ‘fairness’ in JV contractual relations. It is not intended to enable governmental authorities to interfere at will with specific contractual arrangements. Indeed, a similar public policy clause can be found in China’s Contract Law, which stipulates that ‘obviously unfair’ contracts can be changed or terminated.154 It would be absurd to say that because of such a clause, the Chinese government shall be responsible for all breaches of such contracts.

6.68  The contents of a Certificate of Approval, thirdly and finally, demonstrate that by approving a JV contract the Chinese government does not commit itself to any contractual relationship with the foreign investor concerned. Unlike the Egyptian Minister of Tourism’s approval of the contract in the SPP v Egypt case, which was directly affixed to the end of the contract,155 a standard Certificate of Approval takes the form of a separate document, which includes items such as names in Chinese and English, address, type of business, name of investors and their place of incorporation, general amount of investment, registered capital, capital contributions of parties, and scope of business.156 It does not include any commitmentor guarantees of the government.157 Thus one cannot establish a contractual (p. 239) relationship between the foreign investor and the government, from either the JV contract itself or issuing the certificate of approval. Indeed, it would be difficult to argue that the mere act of approval would make the Chinese government a party to myriad JV contracts158 and responsible for any breach of such contracts. It would therefore be difficult for an investor to convince a tribunal that its JV contract should be elevated under an umbrella clause in a BIT.

6.69  The same approach should be applied to the interpretation of the umbrella clauses in the Kuwait159 and the United Arab Emirates BITs.160 They require the host state to observe ‘any obligation it may have entered into in the documents of approval of investments or the approved investment contracts’ of investors of the home state. Such provisions should not be construed so as to render the host state a party to a normal JV contract and responsible for any breach. Rather, they should be understood to cover only such approved investment contracts, whether or not in JV form, in which the state has somehow committed itself to undertake certain obligations. More specifically, they probably refer to investment contracts entered into by local companies (in most cases SOEs) that are ‘empowered to exercise elements of governmental authority’, as discussed above. For example, in a dispute between Jiangsu Provincial government and an American company with regard to a purchase agreement between three local electricity companies and the American company, MIGA’s General Counsel LS Weissenfeld considered that conduct of the local companies could be attributed to the Chinese government. As such, the unilateral decision to alter electricity tariffs amounted to breach of contract by the government.161

(p. 240) 6.70  Likewise, whilst a standard Certificate of Approval of a JV project should not render the state accountable for any breach of that JV contract, the state might be held accountable if it includes in the certificate substantive commitments or guarantees towards foreign investors or the approved foreign-invested enterprise. As Fatouros noted, an instrument of approval might have been ‘preceded by official or semi-official negotiations and constitute, in fact and in spite of their form, a kind of agreement between the state and the investor, providing for the granting of guarantees to the latter and for his corresponding obligations’.162 To illustrate it, he refers to an instrument of approval by the Greek government in May 1956.163 The instrument took the form of a Royal Decree, which is irrevocable and cannot be modified except with the investor’s consent in accordance with local legislation pursuant to which the decree was issued.164 The decree starts with a statement of approval of the investment, but includes a number of guarantees.165 For example, the investing company is allowed to transfer abroad, without limitation, the capital imported and its profits. It is entitled to exemptions from import duties and other charges on the machinery imported by it, as well as all city and other local taxes and charges, during the initial period of ten years. It may, furthermore, employ foreign personnel up to one-quarter of the total employees.166 If the same kind of guarantees or commitments were included in a certificate of approval of a JV project, then the Chinese government would have to honour them. Otherwise, it could be held responsible for any breach of its obligations under the ‘umbrella clause’ in the Kuwait and United Arab Emirates BITs. However, in most cases this will not occur, since a standard Certificate of Approval, as mentioned above, does not contain any such guarantees.

(p. 241) 6.71  As seen in the introductory chapter setting out the main features of foreign investment in China, the law applicable to JV contracts must be Chinese law. This feature of itself would not automatically preclude the application of international legal principles. In fact, if it could be established that the particular JV contract at issue was in fact a state contract, then any relevant BITs would apply. Of course, as confirmed by CMS annulment the BIT does not change the underlying contractual terms and conditions. Whether the umbrella clause could be relied on by an investor to elevate breaches of the JV contract to a breach under the BIT would depend on the wording of the clause and the circumstances of the particular case. In addition, a tribunal would have to consider the contractual dispute-resolution option in the JV Contract. In accordance with Chinese law this will generally be the Chinese courts unless the parties have agreed to arbitration. A tribunal could, as in the SGS v Philippines case, decide that it did have jurisdiction under an umbrella clause but refer the decision on the scope of the obligations to the national courts. In any event, such an outcome is unlikely for purely JV contracts where the government authority has merely approved the contract. It would be a contract between two corporate entities with no state involvement. As a result, they should not be caught by the umbrella clause in Chinese BITs.

Joint Exploitation Contracts

6.72  As explained in the introductory section, a joint exploitation contract has to be signed by CNOOC for the exploration and exploitation of onshore and offshore natural resources in China. In the case of the joint exploitation of petroleum resources, for example, such contract is arranged by a ‘petroleum contract’ between a Chinese party, the CNOOC, and a foreign contractor.167 The nature of the joint exploitation contracts, in particular whether such contracts should be regarded as concession agreements or state contracts, is controversial. And such controversies are closely associated with the role CNOOC plays in these contracts.

6.73  Created in February 1982, right after the REOFF was adopted, CNOOC is a state-owned Chinese enterprise taking overall charge of the joint exploitation operations in cooperation with foreign enterprises.168 It has an independent legal personality, but was granted by the state the exclusive right to explore, exploit, produce, and sell the petroleum extracted from cooperative blocks.169 In the exploitation contract, (p. 242) CNOOC has the right to own 51% of the shares in the joint venture or joint project, though has the option to take a smaller percentage of working interest.170 Under the joint exploitation contract, CNOOC ‘has hardly any substantive obligations towards foreign companies’171 but assists the contractor in opening accounts with the Bank of China, expediting foreign exchange formalities, obtaining office space and supplies, accommodations, and communications, dealing with customs, obtaining permits to export data and samples for analysis or processing, and arranging purchases of data available from relevant Chinese departments.172 Such background information helps in gaining a better understanding of the role of the CNOOC and the nature of the joint exploitation contracts.

6.74  Chinese scholars have argued that joint exploitation contracts are not state contracts or concession agreements or ‘internationalized’ contracts, but contracts subject to Chinese national law.173 There are three main reasons to support this argument.174 First of all, CNOOC is an independent legal person, not a governmental department, and is not acting in the capacity of the sovereign, hence the contracts it enters into cannot be regarded as state contracts. Second, such contracts are concluded in China and approved by Chinese authorities. Such approval does not result in China becoming a party to the contracts. Third, such contracts are governed by Chinese law as required by relevant laws and regulations. The whole point of detaching such contracts from state contracts is obviously to avoid state responsibility on China’s part in case there is any dispute arising out of them. One Chinese scholar has made this clear by confirming that:

The contract signed between a foreign company and the CNOOC is a commercial contract, not a government agreement. This helps the Chinese government avoid any state responsibility if there is a dispute concerning the implementation of the contract.175 (emphasis added)

6.75  However, it might be too optimistic to argue that the Chinese government could be immune from any international responsibilities in the event of a breach of such contracts. It may be argued that the Chinese Contracting Party, the CNOOC, has been legally empowered ‘to exercise elements of the governmental authority’, which are covered by Article 5 of the International Law Commission’s Articles on (p. 243) Responsibility of States for Internationally Wrongful Acts. The Article reads as follows:
Article 5
Conduct of persons or entities exercising elements of governmental authority

The conduct of a person or entity which is not an organ of the State under article 4 but which is empowered by the law of that State to exercise elements of the governmental authority shall be considered an act of the State under international law, provided the person or entity is acting in that capacity in the particular instance.

6.76  Under REOFF, as mentioned above, the CNOOC is a state enterprise empowered by the state to exercise the exclusive right to enter into agreements with foreign investors and to explore, exploit, produce, and distribute offshore petroleum resources. Such exclusive right on petroleum resources is normally exercised by a governmental department and is likely to be considered as an ‘element of governmental authority’. The Wintershall AG et al v Government of Qatar case is a case in point. In this case, the tribunal considered the Qatar General Petroleum Corporation (QGPC), a wholly state-owned company, was acting as an agent of the government of Qatar, and therefore all actions attributed to QGPC were attributed to the government. The tribunal appreciated that the QGPC was created as a separate independent legal personality under Qatari law, but nevertheless concluded that ‘as a matter of Qatari law it is clear that QGPC operates as an arm or agent of the government in respect of the concession cares held by it’.176 Indeed, a recent UNCTAD report on international investment agreements seems to suggest a broader definition of ‘state contract’:

A ‘State contract’ can be defined as a contract made between the State, or an entity of the State, which, for present purposes, may be defined as any organization created by statute within a State that is given control over an economic activity, and a foreign national or a legal person of foreign nationality. State contracts can cover a wide range of issues, including loan agreements, purchase contracts for supplies or services, contracts of employment, or large infrastructure projects, such as the construction of highways, ports or dams. One of the commonest forms of State contracts is the natural resource exploitation contract, sometimes referred to as a ‘concession agreement’, though this is not a strict term of art (Brownlie, 2003, p 522).177 (emphasis added)

6.77  This definition seems to be broad enough to catch CNOOC’s joint exploitation contracts. Nevertheless, classifying such contracts as state contracts may not necessarily invoke the state responsibility of China on a breach of such contractual obligations. As a generally accepted rule, the mere fact that a state is a party to a (p. 244) contract per se will not necessarily make the contract subject to international law. Whether or not the contract would be subject to international law depends on all of the circumstances, including the terms and conditions of the contract and whether there are any applicable international treaties in place. Clearly an umbrella clause can play a significant role in determining whether such contracts are subject to international law. As discussed above, an effective umbrella clause in an applicable Chinese BIT could elevate such contracts from the domestic law domain to the international law plane.

6.78  As already seen, the rules on applicable law and dispute resolution for joint exploitation contracts are the same as those for JVs. The governing law is Chinese law. The parties can agree to arbitrate any dispute under the contracts or of course litigation in the courts of China is possible. The classification of exploitation contracts is the determining factor on the extent to which international treaty obligations would apply. An investor would be well advised to seek to include an arbitration option of choice into the contract at the outset. It then has a certain means of future recourse should a dispute arise. In addition, the structure of its investment in China could be arranged in such a way as to be able to avail of the protections of a BIT. Should a dispute arise, an investor would then have to consider whether and to what extent the joint exploitation contract is a state contract and if so, whether the terms of the umbrella clause would elevate breaches to treaty breaches.

Build-Operate-Transfer (BOT) Contracts

6.79  BOT contracts are one of the very few foreign investment contracts to which the Chinese governmental authorities are directly involved as a Contracting Party.178 Given the cautious attitude towards state contracts and concession agreements, the Chinese government’s move to adopt BOT investment has been a significant one.179 This section discusses some of the unique legal controversies related to BOT contracts, such as governmental guarantees and the legal nature of such contracts.

(p. 245) 6.80  With regard to government guarantees, the two BOT Notices are somewhat inconsistent. The MOFCOM BOT Notice stipulates that government authorities normally shall not offer any guarantees or promises to the project (such as guarantees on forex convertibility and loans).180 By contrast, the Joint BOT Notice provides that the State will guarantee the conversion and repatriation of foreign exchange that the Project Company pays back on loan principals, interests, or dividends.181 It also maintains that in case the Project Company suffers significant economic loss due to China’s policy changes, the Project Company will be allowed to raise the charging standard or extend the concession period.182 Nevertheless, the Joint BOT Notice does not permit guarantees on the rate of return183 and domestic financial institutions are not allowed to provide guarantees for the project’s finance.184

6.81  A central question is whether such governmental guarantees constitute the obligations/commitments covered by the umbrella clauses in the BITs. There are two factors that complicate the answer: (1) the governmental authority involved in the BOT contract is normally a department of a local government, and (2) the other Contracting Party is the Project Company, which more often than not will have registered as a Chinese legal person in the form of either a JV or a WFE.185 Despite such complications, however, the answer to this question should probably be in the affirmative. First, it is well established that conduct of state organs, of central or local government should be attributed to the state. This is confirmed in the ILC Articles on State Responsibility186 and jurisprudence from investment treaty (p. 246) arbitration cases.187 Second, umbrella clauses under Chinese BITs tend to cover ‘any obligations/commitments entered into with regard to investments of investors from the other Contracting Party’. In other words, to benefit from this clause, the commitments do not have to be made directly to the foreign investors. As long as such commitments are made to the relevant investment projects, the foreign investors are entitled to protection under the umbrella clause. In the present case, any guarantees given to the Project Company under a BOT contract would become a kind of obligation or commitment entered into with regard to the foreign investment concerned. It would be eligible for protection under the umbrella clause, as long as the home state of the foreign investors has an effective BIT with China containing such a clause.188

6.82  The nature of BOT contracts is an issue that has been subject to intensive debate within China.189 The essential point of this debate is to ascertain whether such contracts should be governed by domestic law, international law, or both. So far Chinese law has been silent on these issues, leaving them open for interpretation and discussion. There seem to have been three schools of thoughts in China.190 The first asserts that BOT contracts are domestic law contracts, the second, that they are in fact state contracts subject to international law, and third, that they are a new form of contract with unique characteristics subject to its own set of rules, some international, some domestic (sui generis agreements).191

6.83  It is submitted that BOT contracts, together with other concession agreements, should all be regarded as forms of state contracts. However, such state contracts may or may not be subject to international law. In the absence of any international treaty obligations, such contracts should normally be subject to the domestic law (p. 247) of the host state. However, in case there are treaty obligations, for example under a BIT, it is possible that such domestic law obligations may become obligations under international law. Two provisions are particularly important in this regard. One is the umbrella clause discussed above, which may ‘lift’, inter alia, obligations under concession agreements to international law obligations. The other is the definition clause, which tends to include ‘concession agreements’ as a form of ‘investment’ covered by the BIT. In this connection, it is noted that almost all Chinese BITs have adopted such a definition.192

6.84  The exact designation of BOT contracts has been controversial in China (see Chapter 1) but it does seem to satisfy many of the requirements set down in the ILA Articles on State Responsibility and in the awards. It is likely that such contracts would be governed by international law principles and as such would be able to rely on an umbrella clause in an applicable BIT.

Summary

6.85  Having looked at the various types of investment contracts available to an investor in China we can discuss what, if any, is the likelihood of a tribunal applying an umbrella clause to elevate a contract breach under a BIT. In light of the interesting though unsettled jurisprudence considered earlier it is unclear whether the umbrella clause covers all investment contracts in China. It is more likely that, as discussed above, only those contracts concluded with the state or where there has been an exercise of sovereign authority (state contracts) will be protected. Therefore, a BOT contract and a joint exploitation contract are likely to be caught by an umbrella clause. On the contrary, normal JV agreements are commercial contracts in nature, which may not be covered by an umbrella clause.

6.86  BITs may, however, still have a role to play in case there is significant interference with the rights of foreign investors by government authorities. Thus, the CMS v Argentina tribunal held that, whilst the umbrella clause should be restricted to investor–state contracts where the state acts as a sovereign, protection may be extended to commercial contracts ‘when there is significant interference by governments or public agencies with the rights of the investor’.193 The findings of the tribunal on the umbrella clause breach were annulled by the ad hoc committee so the status of such a test is now questionable. Post CMS annulment the obligations undertaken by a state to an investment are owed to the particular contracting entity. Good, clear reasons will be needed to extend these obligations to an investor shareholder. In most cases, however, such protection is provided in BITs by (p. 248) provisions other than the umbrella clause, such as fair and equitable treatment and constant protection and security. The umbrella clause may only be invoked as a legal basis under, for example, the Singapore BIT where the umbrella clause expressly requires each Contracting Party to observe obligations entered into by not only the Contracting Party but also ‘its nationals or companies’ with nationals or companies of the other Contracting Party.194

E.  Implications for Dispute-resolution Planning

6.87  In the negotiation process, for commercial and concession contracts, consideration of the dispute-resolution provisions is often overlooked or considered late.195 The exact terms of a JV, production-sharing agreement, or concession contract will be the subject of review for many months without much consideration of forum selection for future disputes. The commercial terms will be negotiated at length to ensure that the parties each obtain what it considers to be a fair portion of any revenues. Dispute resolution is rarely a priority for either party. Of course this is because it is hard to contemplate at the outset of a project that there could ever be a dispute, but parties are best advised to give it proper consideration at the negotiation stage before vast sums of money are committed.

6.88  It is difficult to agree an alternative dispute-resolution option once a disagreement has actually arisen. And whereas it may not always be possible to obtain the dispute-resolution provision of your choice, at least in the process of negotiation each party will be aware of what has been agreed and the implications of that choice. Party autonomy is paramount in international arbitration. This flexibility allows the parties to design an appropriate arbitration procedure that best suits their needs and the particular case. If the parties do not want to resort to the national courts of China then an arbitration provision should be included. To ensure the arbitration clause is not defective or ‘pathological’196 it should be clearly drafted so that the intention of the parties is beyond doubt.

6.89  In a purely commercial arrangement for a JV in China, as we have seen above the parties are somewhat constrained in their choice of forum. Chinese law stipulates that JVs must be governed by Chinese law and submit to the jurisdiction of the local courts (see Chapter 1). These types of arrangements are purely commercial in (p. 249) nature and even though there is still a requirement that each JV project be approved by the appropriate Chinese government authorities, this does not of itself transform them into international contracts. As such, the investor must be prepared to rely on the dispute-settlement provision in the JV. An investor that does not want to litigate in China should insist on commercial arbitration as a viable alternative in the JV. Unless there is undue interference by the government authority issuing the approval or the Certificate itself imposes additional obligations, an investor is unlikely to successfully argue that there has been a breach under a BIT attributable to China. There is little reason for channelling the investment through a country that has a new generation BIT with China, for example Germany or Finland. It would be difficult to sustain an argument that a breach of a JV amounted to a treaty breach under an umbrella clause. However, a cautious investor may wish to do so.

6.90  The concession contracts and BOTs do not fall within the purely commercial category. As we have seen above, the starting point is that contracts between a state and an investor are not subject to international law. As such a breach of contract would not automatically fall to be considered by an international tribunal under a BIT. However, the added element of state participation makes it more likely that any breach of obligations by the CNOOC in the case of an exploitation contract or the relevant government authority for a BOT may also amount to a breach under international law. This is evidenced in the recent jurisprudence on the application and scope of the umbrella clause. A breach of such contract provisions could be elevated under an umbrella clause to amount to a breach under the BIT.

6.91  In practical terms there remains uncertainty in the application of the umbrella clause. There is as yet no ‘jurisprudence constante’ and there has been ‘some difficulty in identifying and articulating the legal norms created by the umbrella clause’.197 An investor would be ill advised to assume that it can disregard the contractual dispute-resolution provisions and avail of the provisions of an applicable BIT.198 To do so may result in disappointment when a tribunal upholds the choice of forum and stays proceedings pending a resolution in that chosen forum. The SGS v Philippines tribunal confirmed that it had jurisdiction over the performance of the contract claims but declined to consider the scope of the contractual obligation, in that case the determination of the amount in dispute. This fell to be decided by the local courts of the Philippines. An investor should try to negotiate in its contract a dispute-resolution option that it would be happy to rely on. (p. 250) Furthermore, for concession contracts and BOTs it should, if possible, structure its investment to be covered by at least one BIT. There has been much discussion on which type of BIT protection is best for an investor and the conclusion in general seems to be the Dutch BIT, providing as it does for all of the substantive protections, an umbrella clause, and a choice of investor—state dispute-resolution options.

6.92  The main advantage of being able to rely on the provisions of a BIT for an investor in China is to avoid disputes being resolved in the national courts under the contract. It has long been considered that an independent neutral forum is a better option for all parties and in fact was one of the main reasons behind the preparation and adoption of the ICSID Convention.199 The type of disputes likely to arise under an exploitation contract or BOT are exactly the type of disputes that ICSID was designed to deal with: large, long-term contracts often related to the exploitation of natural resources. It has been argued that disputes arising out of concession agreements relating to the exploitation of natural resources are not arbitrable. The sovereignty over the rights of a state to its natural resources has been consistently confirmed,200 as such it has been suggested that arbitrators do not have jurisdiction to determine the validity of state actions relating to natural resources.201 However, even the earlier UN General Assembly Resolution on Permanent Sovereignty over Natural Resources of 1958 confirms in the final paragraph that: ‘Foreign investment agreements freely entered into by or between sovereign States shall be observed in good faith’.202 It is now well established that a dispute arising out of a foreign investment agreement for the exploitation of natural resources can be arbitrated and although a tribunal may not be able to pronounce on a particular action of the government, its financial consequences on the investor may be reviewed.203

6.93  The laws relating to both the exploitation of natural resources and JVs in China emphasize the importance of negotiated settlements of disputes. A foreign investor should consider including a multi-tiered204 or escalation clause into the (p. 251) concession agreement. These clauses have become almost standard for large, long-term projects worldwide.205 A mandatory negotiation period, followed by a short meditation process, can save time and cost. In addition, it may ultimately ensure an easier ongoing relationship between the parties in a potentially lucrative venture. A similar cooling-off period will be found in most BITs, with periods of between three and six months being stipulated within which the parties must try to negotiate. The possibility of reaching a negotiated settlement is always preferable as it saves the time, effort, and cost of pursuing protracted litigation or arbitration, although an amicable settlement is not always possible as indicated by the failed negotiations in the Fuzhou Xinyuan case. (For details of the case see Chapter 8 para 8.163 onwards.)

6.94  If the negotiations do not resolve the dispute the investor will then have to commence arbitration or litigation depending on what has been agreed in the concession agreement. An investor should try to agree to international arbitration – preferably at ICSID as China has been a signatory since 1990. This would eliminate any risk of the government in the case of a BOT or CNOOC in an exploitation contract trying to resist international dispute resolution. Absent any such clear provision it may be more difficult for an investor to avail of the protections in a BIT. The scope of application of the umbrella clause and principles of attributability will have to be considered. Even if the umbrella clause is applied by an international tribunal to breaches of the concession or BOT, the investor may still have to resort to the chosen forum in the contract for determination of its scope.

6.95  In conclusion, an investor must take into account the current legal framework in China for JVs, exploitation contracts, and BOTs. It is worth noting that the legislation relating to these areas is fairly recent, for example the REON of 1993 relating to onshore exploitation and the MOFCOM BOT Notice of 1996. At less than 20 years old it is still in its infancy as it takes time for disputes to arise under the contracts and then be resolved, amicably or otherwise. There is a growing awareness of the availability of international arbitration; in fact, the first investment arbitration claim initiated by a Chinese company was registered at ICSID on 12 February 2007.206 It is anticipated that there will be more investment claims taken by both Chinese investors abroad and foreign investors in China. FDI will continue to be important to China’s economic development for several decades. Foreign investors will want to ensure some certainty and finality in the resolution of disputes. The best advice is to anticipate a narrow interpretation of the umbrella clause (p. 252) provisions in the relevant Chinese BITs. As part of the risk analysis completed before any investment is made, an investor ought to include dispute resolution. As a minimum the following matters should be considered in any risk/cost calculations:

  • •  Check the current position under Chinese law relating to the particular type of investment being made.

  • •  There is limited flexibility in forum selection for commercial JVs.

  • •  The type of dispute-resolution option in an investment contract or BOT depends on the will of the parties.

  • •  If the investor is unable to negotiate a dispute-resolution option of choice it should look to possible alternatives at the international level, i.e. dispute-resolution options available under a BIT or multilateral agreement.

  • •  The investment should be structured in such a way as to avail of the protections under at least one BIT.

  • •  This will not automatically result in the investment being protected by these treaties. In order to be able to avail of such provisions under international investment treaties an investor has to show that the alleged breaches are not only breaches of contract but also amount to a breach under the treaty by applying the umbrella clause.

  • •  If a tribunal were to apply an umbrella clause in this way and affirm its jurisdiction to consider the breaches of contract it would still have to consider whether the impugned actions can be attributed to the state.

  • •  If the acts are not attributable to the state, the investor has no remedy under international law; it would then have to resort to the forum selection in the underlying contract.

  • •  The likelihood of enforcement of any award that may be issued in the investor’s favour.

Footnotes:

See McLachlan, Shore, and Weiniger, International Investment Arbitration, Substantive Principles para 4.97 (OUP, 2007).

The Energy Charter Treaty has an umbrella clause in the last sentence of Art 10(1). Also, the ASEAN Agreement for the Promotion and Protection of Investments has one in Art III(3).

F A Mann, ‘British Treaties for the Promotion and Protection of Investments’ (2008) BYIL 241, 246. The umbrella clause is not an unlimited guarantee and is subject to certain limits, some of which depend on the precise wording of a particular clause. A ‘serious limitation’ identified by F A Mann is that the clause covers only obligations assumed by the state itself.

See Part B of this chapter for discussion on relevant cases.

Umbrella clauses can potentially extend protection to non-contractual obligations undertaken by host states towards foreign investors in the form of, for instance, laws, regulations, or licences. For example, a UNCTAD research notes that: ‘the language of the provision is so broad that it could be interpreted to cover all kinds of obligations, explicit or implied, con-tractual or non-contractual, undertaken with respect to investment generally. A provision of this kind might possibly alter the legal re-gime and make the agreement subject to the rules of international law.’

UNCTAD, ‘Bilateral Investment Treaties in the mid-1990s (United Nations, 1998), 56.

It has been noted that the concept of umbrella clause was first conceived by Sir Elihu Lauterpacht, CBE, QC, the when he was advising the Anglo–Iranian Oil Company in the early 1950s. And the purposes of such a device were to ensure that the host state observe its commitments towards foreign investors undera particular investment contract. A C Sinclair, ‘The Origins of the Umbrella Clause in the International Law of Investment Protection’ 20 Arbitration International (2004, No. 4), 414–18. See also T Wälde, ‘The ‘Umbrella Clause’ in Investment Arbitration: A Comment on Original Intentions and Recent Cases’ The Journal of World Investment and Trade (Vol. 6, April 2005 No. 2), 200–9.

See for example, A C Sinclair, ‘The origins of the Umbrella Clause in the International Law of Investment Protection’, Arbitration International, Vol. 20, No. 4, (2004), p. 411; J Gill, M Gearing and G Birt, Contractual Claims and Bilateral Investment Treaties: A comparative Review of the SGS Cases, Vol 21(5) Journal of International Arbitration p. 397 (2004); T. Wälde, The Umbrella Clause in Investment Arbitration – A Comment on Original Intentions and Recent Cases, Journal of World Investment and Trade, Vol 6 No 2 (April 2005) p. 183; V Zolia, Effect and Purpose of ‘Umbrella Clauses’ in Bilateral Investment Treaties: Unresolved Issues, TDM Vol 2 Issue 5 (2005); E Gaillard, ‘Investment Treaty Arbitration and Jurisdiction Over Contract Claims – the SGS Cases Considered’ in Todd Weiler (Ed) International Investment Law and Arbitration: Leading cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law, p. 325 (Cameron May, 2005); L Martinez, The Interplay of Contract Claims and Treaty Claims: Bayindir v Pakistan (ICSID Case No. ARB/03/29), TDM Vol 3 Issue 2 (2006); D Foster, Umbrella Clauses: A Retreat from the Philippines? 9 (4) International Arbitration Law Review, (2006) pp. 100–108; E Teynier, Les ‘umbrella clauses’, in Mourre Alexis (ed.) Gazette du Palais Les cahiers de l’arbitrage: volume III (2006); B Kunoy, Singing in the Rain-Developments in the Interpretation of Umbrella Clauses, The Journal of World Investment and Trade (2006) 275;T J Grierson Weiler (ed), Investment Treaty Arbitration and International Law (Juris Net Llc, 2008) Part I, 3–60; S Schill ‘Enabling Private Ordering – Function, Scope and Effect of Umbrella Clauses in International Investment Treaties’ International Law and Justice Working Papers, IILJ 2008/9.

The Energy Charter Treaty (ECT) has an umbrella clause in Art 10(1) final sentence. There has been no award dealing with the application of this provision. The Alstom v Mongolia (Alstom Power Italia SpA and Alstom SpA v Republic of Mongolia, ICSID Case No. ARB/04/10) arbitration commenced under both the ECT and the Italy-Mongolia BIT was settled. It is understood that the investors’ claim relied on the umbrella clause in Art 10(1) of the ECT, see Investment Treaty Arbitration and Asia: Survey and Comment, John Savage Asian International Arbitration Journal, Vol. 1 No. 1 (2005), pp. 3–48. The ASEAN Agreement for the Promotion and Protection of Investments (ASEAN Agreement) also contains an umbrella clause in Art III(3) which provides that ‘[e]ach Contracting Party shall observe any obligation arising from a particular commitment it may have entered into with regard to a specific investment of nationals or companies of the other Contracting Parties’. There is no equivalent in NAFTA, See Waste Management, Inc. v Mexico (Number 2), ICSID Case No. ARB(AF)/00/3 Award 30 April 2004, para 73.

A C Sinclair, ‘The origins of the Umbrella Clause in the International Law of Investment Protection’, Arbitration International, Vol. 20, No. 4, (2004), p. 411 at 415. He notes that there were earlier examples of ‘umbrella treaties’ from the 1920s.

10  Art II provides: ‘Each Party shall at all times ensure the observance of any undertakings, which it may have given in relation to investments made by nationals of any other Party.’ Full text available from UNCTAD online at: www.unctad.org/sections/dite/iia/docs/Compendium//en/137%20volume%206.pdf

11  K Yannaca-Small, ‘Interpretation of the Umbrella Clause in the Investment Treaties’, OECD Working Papers on International Investment (No 2006/3, Oct 2006), at 4.

12  As cited in Yannaca-Small, ibid, at 5.

13  ibid, at 6.

14  J Gill et al., ‘Contractual Claims and Bilateral Investment Treaties: A Comparative Review of the SGS Cases’ 21 J. Int’l. ARB. 397, 403 fn 31 (2004) (finding that approximately 40% of a sample of BITs taken from INVESTMENT TREATIES (ICSID ed., 2003) contained umbrella clauses).

15  This is clearly illustrated by the cases filed annually at ICSID eg four cases filed between 1966, the year the treaty entered into force, and 1975, whereas 36 cases were filed in 2007, see www.worldbank.org/icsid/cases/pending.htm

16  Although there was an umbrella clause in Art 3(4) of the BIT applied by the tribunal in Fedax NV v Venezuela, ICSID Case No. ARB/96/3, Award, 9 March 1998. However, the tribunal did not examine the application of the clause other than to confirm that Venezuela ‘was under an obligation to honor precisely the terms and conditions governing such investment, laid down mainly in Art 3 of the Agreement, as well as to honor the specific payments established in the promissory notes issued …’ para 29. In addition, CMS argued there had been a breach of the umbrella clause although this was not dealt with in the Jurisdiction award of 17 July 2003. A breach of the umbrella provision was confirmed in the merits award of 12 May 2005, CMS Gas Transmission Company v Argentina, ICSID Case No. ARB/01/8, Award of 12 May 2005, paras 296–303.

17  SGS Société Générale de Surveillance SA v Pakistan, ICSID Case No. ARB/01/13, Award on Jurisdiction, 6 August 2003, para 99. See also A C Sinclair, ‘The Origins of the Umbrella Clause in the International Law of Investment Protection’, Arbitration International, Vol. 20, No. 4, (2004), p. 411 at 412 where he confirms that the uncertainty in effect of the clause is reflected in the ‘diverse metaphors used to describe them, including “elevator”, “mirror effect”, “parallel effect”, “umbrella” or “sanctity of contracts/pacta sunt servanda’.”

18  ibid para 164.

19  ibid para 167.

20  ibid, para 168.

21  The tribunal in Eureko v Poland (Award 19 August 2005) felt that reliance on this maxim was essentially a ‘reversion to a doctrine that has been displaced by contemporary customary international law, particularly as that law has been reshaped by the conclusion of more than 2000 essentially concordant bilateral investment treaties’. para 258.

22  SGS Société Générale de Surveillance SA v Philippines, ICSID Case No. ARB/02/6. Award on Jurisdiction, 29 January 2004.

23  J Crawford, ‘Treaty and Contract in Investment Arbitration,’ 24(3), Arbitration Interna-tional (2008), 351, 368.

24  ibid, paras 120–24.

25  ibid, para 126.

26  ibid para 127.

27  J Crawford, ‘Treaty and Contract in Investment Arbitration’, Vol 24(3), Arbitration International (2008), 251, 368.

28  This approach has been criticized not least in the separate declaration made by one of the arbitrators, Professor Antonio Crivellaro. He could see no reason, having accepted the admissibility of the claims, why the tribunal ‘could not deal with and decide on the merits of the payment claim, including quantum, after proper examination of either party’s future arguments and defences.’ Separate Declaration para 11. See also V Zolia, Effect and Purpose of ‘Umbrella Clauses’ in Bilateral Investment Treaties: Unresolved Issues, TDM Vol 2 Issue 5 (2005), p. 31 and E Gaillard, ‘Investment Treaty Arbitration and Jurisdiction Over Contract Claims – the SGS Cases Considered’ in Todd Weiler (ed) International Investment Law and Arbitration: Leading cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law, 344

29  BP America Production Co. and Others v Argentina, ICSID Case No. ARB/04/8 Award on Jurisdic-tion, 27 July 2006, para 105.

30  SGS v Pakistan, Jurisdiction, para 173(emphasis added). See also BP America Production Co. and Others v Argentina, id, para 103 (where the tribunal refers to this nuance).

31  The Swiss government wrote an open letter expressing its alarm at the narrow interpretation applied by the tribunal to the provision ‘which not only runs counter to the intention of Switzerland when concluding the Treaty but is quite evidently neither supported by the meaning of similar articles in BITs concluded by other countries nor by academic comments on such provisions.’ 19 Mealey’s International Arbitration Reports (February, 2004) E-1. It is not clear whether the tribunal would have reached a different conclusion if SGS had submitted evidence from the Swiss government to this effect during the arbitration.

32  Joy Mining Machinery Limited v Egypt, ICSID Case No. ARB/03/11, Award on Jurisdiction 6 August 2004; Salini Construttori SpA and Italstrade SpA v Jordan, ICSID Case No. ARB/02/13, Decision on Jurisdiction, 9 November 2004; El Paso Energy International Company v Argentina, ICSID Case No. ARB/03/15, Award on Jurisdiction, 26 April 2006 and BP America Production Co. and Others v Argentina, ICSID Case No. ARB/04/8 Award on Jurisdiction, 27 July 2006.

33  LG&E v Argentina, ICSID Case No. ARB/02/1, Award on Jurisdiction, 30 April 2004; Consortium Groupement L.E.S.I.- DIPENTA v Algeria, ICSID Case No. ARB/03/08, Award, 10 January 2005; Eureko BV v Poland, Partial Award, 19 August 2005, and Noble Ventures, Inc. v Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005.

34  Joy Mining v Egypt, Jurisdiction, para 81. It is not clear how this somewhat absurd ‘magnitude’ test would actually apply.

35  Salini v Jordan, Jurisdiction, para 126.

36  Art 2(4) Italy/Jordan BIT. The tribunal did confirm that the State parties were still bound by their contractual obligations, ‘this undertaking was not reiterated in the BIT. Therefore, these obligations remain purely contractual in nature and any disputes regarding the said obligations must be resolved in accordance with the dispute settlement procedures foreseen in the contract.’ ibid para 127. In fact this provision was said not to be ‘an umbrella clause at all’ by Professor Crawford when discussing the significance of the language of each umbrella clause, J Crawford, ‘Treaty and Contract in Investment Arbitration’ (2008) 24(3) Arbitration International, 351, 367.

37  Eureko v Poland, Partial Award, para 260. There was a strong dissenting opinion by Professor Rajski on this point. He felt that Eureko had ‘adopted tactics to politicize on an international level its commercial dispute with the State Treasury, as a PZU shareholder, in order to be able to mask it as a BIT dispute with the Republic of Poland.’ Dissenting Opinion, para 6. The claimant was able to avoid the pre-agreed jurisdiction forum in the contract.

38  Noble Ventures, Inc. v Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005, para 53.

39  ibid, para 61.

40  ibid, para 51. It was in fact legislative acts that had to be considered by the tribunal in LG&E v Argentina.

41  CMS v Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005, para 299.

42  J Crawford, ‘Treaty and Contract in Investment Arbitration’ (2008) 24(3) Arbitration International, 351, 368.

43  TGN was one of the companies created to transport gas after the restructuring by Argentina of the industry in 1992 which was subsequently privatized. CMS held a 29.42% holding in this company.

44  LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v Argentina ICSID Case No. ARB/02/1, Award 3 October 2006, para 170.

45  ibid, para 176. The tribunal concluded that there had been a breach of the standard of fair and equitable treatment by Argentina but that the actions were not arbitrary nor did they amount to an indirect expropriation. It also accepted Argentina’s submission on necessity and excused it from liability for any breaches between 1 December 2001 and 26 April 2003. Damages for violations falling outside this period of the state of necessity and interest will be determined in the second phase of the arbitration.

46  Dolzer and Stevens in their seminal work had referred to this possibility in comments on the umbrella clause which ‘seek to ensure that each Party to the treaty will respect specific undertakings towards nationals of the other Party. The provision is of particular importance because it protects the investor’s contractual rights against any interference which might be caused by either a simple breach of contract or by administrative or legislative acts … (emphasis added) R Dolzer and M Stevens, Bilateral Investment Treaties (1995), p. 82.

47  J Crawford, ‘Treaty and Contract in Investment Arbitration’ (2008) 24(3) Arbitration International, 351, 370.

48  Although both tribunals accepted that umbrella clauses may cover investment contracts entered into by the state as a sovereign. See El Paso Energy International Company v Argentina ICSID Case No. ARB/03/15, Award on Jurisdiction, 27 April 2006, para 81 and Pan American Energy LLC and BP Argentina Exploration Company v Argentina, ICSID Case No. ARB/03/13, Decision on Preliminary Objections, 27 July 2006, para 109.

49  Sempra Energy International v Argentina ICSID Case No. ARB/02/16, Award on Jurisdiction 11 May 2005, para 101.

50  Azurix v Argentina ICSID Case No. ARB/01/12 Award 14 July 2006 where it submitted that ‘Azurix intently confuses Investment Agreement with investment, terms that are not equivalent or amalgamable.’ Para 290.

51  Siemens A.G. v Argentina, ICSID Case No. ARB/02/08, Award 6 February 2007 paras 200 and 206.

52  PSEG Global et al v Turkey, ICSID Case No. ARB/02/5, Award of 19 January 2007.

53  ibid para 271. The tribunal was referring to the award in Joy Mining Machinery Limited v Egypt (ICSID Case No. ARB/03/11), Award on Jurisdiction of 6 August 2004, paras 78, 81.

54  S Schwebel, International Arbitration: Three Salient Problems (CUP, 1987) p. 111

55  See the much cited cases of the American-Mexican Claims Commission of North American Dredging Company Case (1926), 4 UN Rep. 26 and the American –Venezuelan Claims Commission in Woodruff (1903), Reports of International Arbitral Awards, vol. IX, p. 213.

56  For more on the distinction between treaty rights and contract claims see B Cremades and D Cairns, ‘Contract and Treaty Claims and Choice of Forum in Foreign Investment Disputes’, in N Horn (Ed) Arbitrating Foreign Investment Disputes, p. 325 where they identify five criteria to distinguish a treaty claim from a contract claim. See also S Alexandrov, ‘Breaches of Contract and Breaches of Treaty. The Jurisdiction of Treaty-based Arbitration Tribunals to Decide Breach of Contract Claims in SGS v Pakistan and SGS v Philippines’, 5 Journal of World Investment and Trade (August 2004); C Schreuer, ‘Investment Treaty Arbitration and Jurisdiction over Contract Claims– the Vivendi 1 case Considered’ in T Weiler (ed) International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, 2005) p. 281; Y Shany, Contract Claims v Treaty Claims: Mapping Conflicts Between ICSID Decisions on Multi-Sourced Investment Claims, Vol. 99, American Journal of International Law p. 835 (2005) and A El-Kosheri, ‘Contractual Claims and Treaty Claims Within the ICSID Arbitration System’ in B Cremades and J Lew (Ed) Parallel State and Arbitral Procedures in International Arbitration: Dossiers, ICC Institute of World Business Law (ICC, 2005).

57  See for a comprehensive review of the awards and the implications of contract forum selection clauses in a contract between an investor and a host state, Z Douglas, The Hybrid Foundation of Investment Treaty Arbitration, 74 British Yearbook of International Law (2004) 141 at 241 et seq.

58  Azurix v Argentina, ICSID Case No. ARB/01/12 Award, 14 July 2006 para 383.

59  Art II(2)(c) contains the umbrella clause: ‘Each Party shall observe any obligation it may have entered into with regard to investments’.

60  Azurix v Argentina, ICSID Case No. ARB/01/12 Award, 14 July 2006, para 384.

61  Noble Ventures v Romania, Award, para 55.

62  Compañiá de Aguas del Aconquija SA and Vivendi Universal v Argentina, ICSID Case No. ARB/97/3, Decision on Annulment, 3 July 2002, para 96.

63  D Bishop, J Crawford, and M Reisman, Foreign Investment Disputes, Cases, Materials and Commentary, (Kluwer, 2005) p. 811.

64  Salini Construtorri SpA and Italstrade SpA v Morocco, ICSID Case No. ARB/00/4, Jurisdiction, 23 July 2001, para 61.

65  Impregilo SpA v Pakistan, ICSID Case No. ARB/03/3 Award on Jurisdiction 22 April 2005, para 262. See also A Harb, The Wrongful Acts of Independent State Entities and Attribution to States in International Investment Disputes TDM, Volume 3 (5) (December 2006) pp.13–16.

66  For all of the grounds pleaded by Argentina see CMS Gas Transmission Company v Argentina, ICSID Case No. ARB/01/8, Argentine Republic’s Application for Annulment, 8 September 2005.

67  CMS Gas Transmission Company v Argentina, ICSID Case No. ARB/01/8 Annulment Decision 25 September 2007 para 95. This decision was voted by practitioners in the field of investment arbitration to be the most significant award in 2007 (not just for its impact on the umbrella clause debate as it also had to consider the other award findings on state of necessity etc). See OGEMID Archives at www.transnational-dispute-management.com.

68  CMS Gas Transmission Company v Argentina, ICSID Case No. ARB/01/8 Award 12 May 2005 para 299.

69  CMS Gas Transmission Company v Argentina, ICSID Case No. ARB/01/8 Annulment Decision 25 September 2007 para 97.

70  J Crawford, ‘Treaty and Contract in Investment Arbitration’ (2008) 24(3) Arbitration International, 351, 370. See also generally N Gallus, ‘An umbrella just for two? BIT obligations observance clauses and the parties to a contract’ (2008) 24(1) Arbitration International, 157.

71  See online discussions on OGEMID Archive S Schill, ‘CMS Annulment and umbrella clause’ (2007) 12 October.

73  ibid.

74  This view has been endorsed by other awards, for example, in Salini para 126 and Noble Ventures paras 56 and 58–9.

75  OECD Working papers on International Investment, No 2006/3, Interpretation of the Umbrella Clause in Investment Agreements (October 2006) p. 22. Online at: www.oecd.org/dataoecd/3/20/37579220.pdf

76  See Rajski, Dissenting Opinion in Eureko v Poland, Particl Award, para 11 and in Pan American Energy LLC and BP Argentina Exploration Company v Argentina, Preliminary Objections, para 106.

77  Charles N Brower, ‘The Future of Foreign Investment—Recent Developments in the International Law of Expropriation and Compensation’ in V S Cameron (eds), Private Investors Abroad – Problems and Solutions in International Business in 1975 (Southwestern Legal Foundation Symposium Series, Private Investors Abroad, Matthew Bender, New York, 1976), pp. 93, 105 n. 27 as cited by Antony Sinclair, ‘The Origins of the Umbrella Clause in the International Law of Investment Protection’, Arbitration International 2004, Vol. 20, No 4, pp. 411–434.

78  S M Schwebel, ‘On Whether Breach by a State of a Contract With an Alien is a Breach of International Law’, in Justice in International Law: Selected Writings of Judge Stephen M Schwebel (1994), 425, 428.

79  Thomas Wälde, ‘The Umbrella Clause in Investment Arbitration – A Comment on Original Intentions and Recent Cases’, The Journal of World Investment and Trade, Vol. 6 No 2, April 2005, 236.

80  The former tribunal held that it does not have jurisdiction at all on the contractual disputes, whilst the latter considered it had jurisdiction but could not admit the case and therefore decided to stay the proceeding directing the parties to seek remedies first from the local courts designated in the underlying contract. See SGS v Pakistan and SGS v Philippines.

81  El Paso Energy International Company v Argentina ICSID Case No. ARB/03/15, Award on Jurisdiction, 27 April 2006, para 81. This view was endorsed by the tribunal (comprised of two of the same members as in El Paso) in Pan American Energy LLC and BP Argentina Exploration Company v Argentina ICSID Case No. ARB/03/13 and BP America Production Co. and Others v Argentina ICSID Case No. ARB/04/8 Award on Jurisdiction 27 July 2006 at para 108 where it confirmed ‘it was necessary to distinguish the State as a merchant from the State as a sovereign.’ There has been some concern voiced over the reliance by the tribunal on Art VII (the investor/state dispute resolution provision) to interpret and essentially define the scope of a substantive provision of the treaty.

82  CMS v Argentina, Jurisdiction, para 299.

83  However, as discussed below, general obligations in the form of legislative acts may be caught by the umbrella clause in case the applicable umbrella clause expressly covers both ‘general and specific’ obligation/commitments, such as Art 3.3 of the New Zealand BIT.

With regard to the specific forms of specific obligation/commitments by host states, Fatouros considers that they include three types of commitments, namely approval instruments, concession agreements, and guarantee contracts. Among them, both concession agreement and guarantee contracts are contractual commitments, whilst only approval instruments (or licence/authorization) are non-contractual instruments. For further details see AA Fatouros, government Guarantees to Foreign Investors (Columbia University Press 1962), at 120–28.

84  SGS v Philippines para 121.

85  It is a complex issue to ascertain whether a particular piece of legislation creates specific commitments towards certain investments or investors. The decisive criterion should be whether the target ‘investments or investors’ are specific, not whether the commitments contained in the legislation are specific. In other words, if an act only applies to one or certain expressly identified foreign investors or foreign investment projects, as the special local regulation in the Changchun Huijin case discussed below, it may be said that the act is targeting those investors or investments identified and may therefore create specific obligation towards them. On the contrary, if an act does not expressly target any specific investment or investor, it may be assumed that it does not create specific commitments vis-à-vis those investments or investor, unless it can be proved that the act actually targeted certain specific investment projects or investors which can be clearly identified at the time of the adoption of the act. The LG & E tribunal seemed to have missed the point here as it mainly analysed the contents of the Gas Law and concluded that it created specific commitments, without sufficiently looking into the question whether the law actually targeted a particular investment project.

86  A few other BITs contain a ‘preservation of rights’ clause, which has similar effect to an umbrella clause. See Section 6.50 below.

87  J Gill et al., ‘Contractual Claims and Bilateral Investment Treaties: A Comparative Review of the SGS Cases’ 21 J. Int’l. ARB. 397, 403 fn 31 (2004) (finding that approximately 40% of a sample of BITs taken from INVESTMENT TREATIES (ICSID ed., 2003) contained umbrella clauses).

88  Both the 1980 and the 1990 Model BITs of China maintain the same umbrella clause, which states that ‘Each Contracting Party shall observe any commitments it may have entered into with the investors of the other Contracting Party as regards to their investment.’ See Art. 2 (2), 1980 Model BIT and Art. 10(2), 1990 Model BIT. It is interesting that the later Model BIT of China of 1994 does not appear to have any umbrella clause at all, see text online at: www.unctad.org/sections/dite/iia/docs/Compendium//en/64%20volume%203.pdf

89  The 1991 Model BIT of UK (Art 2(2)), the 2000 Model BIT of Denmark (Art. 2.3), the 2002 Model BIT of Sweden (Art. 2(4)), for example, all follow this model. UNCTAD IIA Issue Papers: ‘State Contract’ (2004) 20.

90  Art 2(2), UK BIT. Full text available online at: www.unctad.org/sections/dite/iia/docs/bits/uk_china.pdf

91  The English translation is: Either Contracting Party shall constantly guarantee the observance of the commitments it has entered into with respect to investments of investors of the other Contracting Party.

92  Art 11, Swiss-Pakistan BIT.

93  The Swiss–Philippines BIT stipulates that: ‘Each Contracting Party shall observe any obligation it has assumed with regard to specific investments in its territory by investors of the other Contracting Party’.

See Art X (2), Swiss–Philippines BIT.

94  V Lowe, ‘Changing Dimensions in International Investment Law’, Lectures at the Chinese Academy of International Law at Xiamen, China, University of Oxford Faculty of Law Legal Studies Working Paper Series No 4/2007 (March 2007), at 104.

95  K Yannaca-Small, ‘Interpretation of the Umbrella Clause in the Investment Treaties’, (2006), OECD Working Papers on International Investment No 2006/3, 3.

96  Lowe, ‘Changing Dimensions in International Investment law’, at 106.

97  Eureko BV v Poland, Partial Award 19 August 2005 at para 246.

98  SGS v Philippines, para 119. See also, Lowe, ‘Changing Dimensions in International Investment Law’, above, at 106.

99  El Paso Energy International Company v The Argentine Republic, ICSID Case No. ARB/03/15 Award on Jurisdiction 27 April 2006 para 70. See also Pan American Energy LLC and BP Argentina Exploration Company v Argentine Republic, ICSID Case No. ARB/03/13, Award on Jurisdiction 27 July 2006 para 99. See for a critical analysis of this approach JP Gaffney and JL Loftis, ‘The ‘Effective Ordinary meaning’ of BITs and the Jurisdiction of Treaty-Based Tribunals to Hear Contract Claims’ (2007) 8(1) Journal of World Investment and Trade 5.

100  See eg art 10.2, Lebanon BIT; Art 10.2, Brunei BIT.

101  Australia BIT, Art. 11.

102  W Ben Hamida, La clause relative au respect des engagements dans les traités d’investissement, Institut des Hautes Études internationales, May 2005 at 21, as cited in Yannaca-Small, 2006, p. 10–11.

103  This interpretation might be relevant when the umbrella clause refers to ‘obligations entered into with regard to investments’, rather than ‘obligations entered into with regard to investments of investors of the other Contracting Party’. Whilst European BITs tend to use the latter, earlier US BIT as exemplified by Art 2(2)(c) of the US–Argentina BIT adopted the former formation. Art 2(2)(c) of the US-Argentina BIT reads, ‘[E]ach Party shall observe any obligation it may have entered into with regard to investments’.

104  SGS v Pakistan, Jurisdiction, paras 163–6.

105  Noble Ventures, Inc. v Romania, ICSID Case No. ARB/01/11, Award 12 October 2005 para 51.

106  Art 4.2 Thailand BIT.

107  Art 11, Australia BIT.

108  See eg Salini Costruttori SpA and Italstrade SpA v Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction of July 23, 2001; Saipem SpA v People’s Republic of Bangladesh, ICSID Case No. ARB/05/7, Decision on Jurisdiction of March 21, 2007; and Tokios Tokelés v Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction of April 29, 2004.

109  Fraport AG Frankfurt Airport Services Worldwide v Philippines, ICSID Case No. ARB/03/25, Award 16 August 2007, para 396. See also Inceysa Vallisoletana S.L. v El Salvador, ICSID Case No. ARB/03/26, Award 2 August 2006 where the tribunal also declined jurisdiction as the investments had been fraudulently made and were not in accordance with the law.

110  ibid para 402.

111  Art 8(2), Germany BIT (1983). In the new BIT, the ‘legal change’ limitation is lifted. See Art 10(2), 2003 Germany BIT.

112  Art 4.2, Thailand BIT.

113  It was partly for the avoidance of such consequences that the SGS v Pakistan tribunal denied the ‘elevator effect’ of the umbrella clause in the Swiss–Pakistan BIT. The SGS v Philippines tribunal disagreed with SGS v Pakistan on the exact scope of application of the clause. It nevertheless shared the same concern and held that the umbrella clause only applied to a legal obligation that a host state assumed ‘vis-à-vis the specific investment—not as a matter of the application of some legal obligation of a general character’. SGS v Pakistan, para 166; SGS v Philippines, para 121.

114  LG&E v Argentina, para 174.

115  As can be seen in the provision and as said above, the BIT also attaches a double ‘domestic law’ limitation. Art 11, Australia BIT.

116  Other such Australian BITs include these signed with Chile, Papua New Guinea, and Poland. See Yannaca-Small, 2006, p. 11.

117  Including Mexican BITs entered into with Austria, Belgium-Luxemburg, Germany, Greece, and France. ibid.

118  The 1967 OECD draft Convention on the Protection of Foreign Property (Art 2), for example, adopted a rather broad general formulation with its umbrella clause, which says: ‘[E]ach Party shall at all times ensure the observance of undertakings given by it in relation to property of nationals of any other Party’. However, its accompanying commentary insists that undertakings to be covered by this clause ‘must relate to the property concerned; it is not sufficient if the link is incidental’. ‘Draft Convention on the protection of foreign property and Resolution of the Council of the OECD on the Draft Convention’, OECD Publication No 23081, November 1967, Notes and Comments to Art 2, para 3(a). Dolzer and Stevens also considered that these clauses ‘seek to ensure that each party to the treaty will respect specific undertakings towards nationals of the other party.’ (emphasis added) See R Dolzer and M Stevens ‘Bilateral Investment Treaties’, Kluwer Law, 1995, pp. 81–2.

119  Art 8.2, Austria BIT.

120  Art 9.2, Jordan BIT.

121  Enron Corporation and Ponderosa Assets, LP v Argentina, ICSID Case No. ARB/01/3, Award 22 May 2007 para 274.

122  Art 2.2, Kuwait BIT.

123  Art 2.3, United Arab Emirates BIT.

124  The 2004 US Model BIT defines the two terms as follows: ‘investment agreement’ means a written agreement between a national authority of a Party and a covered investment or an investor of the other Party, on which the covered investment or the investor relies in establishing or acquiring a covered investment other than the written agreement itself, that grants rights to the covered investment or investor:

  1. (a)  with respect to natural resources that a national authority controls, such as for their exploration, extraction, refining, transportation, distribution, or sale;

  2. (b)  to supply services to the public on behalf of the Party, such as power generation or distribution, water treatment or distribution, or telecommunications; or

  3. (c)  to undertake infrastructure projects, such as the construction of roads, bridges, canals, dams, or pipelines, that are not for the exclusive or predominant use and benefit of the government.

‘Investment authorization’ means an authorization that the foreign investment authority of a Party grants to a covered investment or an investor of the other Party.

See Art 1, US Model BIT 2004.

125  See eg Eureko v Poland, LG&E v Argentina, Enron v Argentina, Siemens v Argentina, and the discussion above in Part B of this chapter. There has been disquiet about such a wide interpretation voiced by the awards in El Paso Energy International Company v Argentina and Pan American Energy LLC and BP Argentina Exploration Company v Argentina.

126  Art 15, Singapore BIT; Art 15 Sri Lanka BIT; Art 10, Yugoslavia BIT.

127  Art 15, Singapore BIT.

128  Thomas Wälde, ‘The Umbrella Clause in Investment Arbitration – A Comment on Original Intentions and Recent Cases’, (2005) Vol. 6 (2) The Journal of World Investment and Trade, 236.

129  CMS v Argentina, ICSID Case No. ARB/01/8, Award 12 May 2005, para 299.

130  Such BITs include these with France (Art 9), Czech (2005, Art 10.2), Korea (Art 12.2), Cambodia (Art 10), Qatar (Art 10), Zimbabwe (Art 10).

131  Art 9, France BIT.

132  They are BITs concluded with Kuwait (Arts 2.2 and 11), United Arab Emirates (Arts 2.3 and 13), Egypt (Arts 2.2 and 13), Tunisia (Arts 10.1–3), and Argentina (Arts 3.1 and 9).

133  Impregilo SpA v Pakistan, ICSID Case No. ARB/03/3, Decision on Jurisdiction, 22 April 2005, para 221.

134  ibid para 223.

135  See for example Maffezini v Spain, ICSID Case No. ARB/97/7 where the tribunal endorsed the view that the investor could avail of more favourable dispute resolution provisions in another BIT.

136  SGS v Pakistan, para 163.

137  For instance, it is settled that the MFN clause should be applied to benefits resulting from legal instruments of the same nature (ejusdem generis) to a BIT, rather than treaties of any kind. Often, it is also subject to express exceptions stipulated in BITs such as customs unions, free trade areas, double taxation treaties, etc. Likewise, it is suggested that umbrella clauses should only cover obligations/commitments towards a ‘specific investment’, rather than universally applicable obligations or commitments. Shan, legal framework (stating limitations on MFN clause application), 151; SGS v Philippines, para 121 (stating that: ‘For Art X(2) to be applicable, the host State must have assumed a legal obligation, and it must have been assumed vis-à-vis the specific investment—not as a matter of the application of some legal obligation of a general character. This is very far from elevating to the international level all ‘the municipal legislative or administrative or other unilateral measures of a Contracting PArty’.’

138  The tribunal reasoned that:‘Given the above structure and sequence of the rest of the Treaty, we consider that, had Switzerland and Pakistan intended Art 11 to embody a substantive ‘first order’ standard obligation, they would logically have placed Art 11 among the substantive ‘first order’ obligations set out in Art s 3 to 7. The separation of Art 11 from those obligations by the subrogation Article and the two dispute settlement provisions (Art s 9 and 10), indicates to our mind that Art 11 was not meant to project a substantive obligation like those set out in Art s 3 to 7, let alone one that could, when read as SGS asks us to read it, supersede and render largely redundant the substantive obligations provided for in Art s 3 to 7.’

See SGS v Pakistan, para 170.

139  They include the BITs with Demark (Art 3.1), Netherlands (2001, Art 3.4), UK (Art 2.2), Switzerland (Art 5), Hungary (Art 3.1), Spain (1992, Art 3.1), Greece (Art 2.6), Iceland (Art 2.2), Macedonia (Art 2.3), Bosnia Herzegovina (Art 3.2), Thailand (Art 4.2), Kuwait (Art 2.2), United Arab Emirates (Art 2.3), New Zealand (Art 3.3), Egypt (Art 2.2), and Argentina (Art 3.1).

140  The tribunal concluded that as the contract in that case had been entered into between Impregilo and WAPDA (the Pakistan Water and Power Development Authority) and not the state of Pakistan, the investor could not rely on the MFN in Art 3 of the BIT to import the obligations under the umbrella clause in Pakistan’s other BITs. In fact, the tribunal held that even ‘assuming arguendo that Pakistan, through the MFN clause and the Swiss–Pakistan BIT, has guaranteed the observance of the contractual commitments into which it has entered together with Italian investors, such a guarantee would not cover the present Contracts – since these are agreements into which it has not entered. On the contrary, the Contracts were concluded by a separate and distinct entity’. Impregilo v Pakistan, ICSID Case No. ARB/03/3, para 223.

141  For an introduction to the various forms of foreign investment in China, including EJV, CJV, JE, and BOT mentioned in this pArt, see Chapter 1 of this book.

142  JV arrangements can have an ‘agreement’ (Xieyi), in addition to the contract (Hetong) between the pArties. For example, CJVL, EJVL, and their implementing regulations general require the JV pArties to submit both the ‘agreement’ and the ‘contract’ for approval. See Art 3, EJVL, and Art. 7 of its implementing regulations, and Art 5, CJVL, and Art. 7 of its implementing regulations.

143  Despite a legacy of a restricted economy, more than two decades of economic reform has significantly transformed Chinese companies to independent legal entities undertaking obligations in their own names. Most of them are no longer an auxiliary to a governmental depArtment, nor do they exercise any public authority. Therefore, the contracts they enter into with foreign investors should generally be regarded as purely commercial contracts, rather than state contracts. See M Yao, Textbook on Foreign Investment Enterprises (Law Press China, 1990), 72–3.

There are, nevertheless, still certain State Owned Enterprises (SOEs) that may be exercising some elements of governmental authority, which will be discussed later.

144  The ICC tribunal arrived at a decision in favour of the foreign investors, SPP and SPP ME, and held that Egypt should be considered as a pArty to the contract. The tribunal reasoned that:‘In our view, the requirement of the Minister’s signature meant and was understood to mean by the pArties that through the signature of the Minister, not only was the government confirming its approval of all contractual obligations undertaken by EGOTH in compliance with the laws of Egypt, but it was also guaranteeing to the investor its continuing agreement and support of the project. By the Minister signing not only ‘approved’ but also ‘agreed’ (which clearly means the undertaking of an obligation of its own) the government also became a contractual pArty to the December Agreement.’ (emphasis added).

For further details of the award, see International Chamber of Commerce Court of Arbitration: Award in the Arbitration between S.P.P. (Middle East) Limited, Southern Pacific Properties Limited v the Arab Republic Of Egypt, The Egyptian General Company for Tourism and Hotels (March 11, 1983), 22 International Legal Materials (ILM) 752, pp. 766–7, para 46.

145  France: Court of Appeals of Paris Decision in Arab Republic of Egypt v Southern Pacific Properties, Ltd et al (Appellate Review of Arbitral Awards between States and Private PArties), 23 International Legal Materials (ILM) 1004, 1056; France: Court of Cassation Decision in Southern Pacific Properties Ltd et al v Arab Republic Of Egypt (Appellate Review of Arbitral Awards Between States and Private PArties, January 6, 1987), 26 International Legal Materials (ILM) 1004, 1007. See the English High Court decision in Kazakhstan v Istil Group Inc: [2006] EWHC 448 where an LCIA award was set aside and the court confirmed there was no ‘basis for disregarding that separate legal personality on the basis that Karmet was ‘an organ’ of [the state]’ para 66. The government’s power to appoint directors of Karmet and any requirement that Karmet should obtain prior approval from the government to enter into any contract did not justify piercing the corporate veil. However, see to the contrary the decision of the US Court of Appeals Fifth Circuit in Bridas SAPIC v Turkmenistan (21 April 2006) where the court reversed the vacatur of an award of US$495million against Turkmenistan. It confirmed that the government had in fact exercised control over Turkmenneft, manipulating it legally and economically to repudiate the contract with Bridas.

146  ILA State Responsibility Articles, Art 5. The commentary on Art 5 confirms that it covers a ‘wide variety of bodies which, though not organs, may be empowered by the law of a State to exercise elements of governmental authority.’ Art 5 refers to entities that have been ‘empowered to a limited extent or in a specific context, to exercise specified elements of governmental authority.’ J Crawford, The International Law Commission’s Articles on State Responsibility: Introduction, Text and Commentaries (CUP, 2002) p. 100 paras (1) and (3).

147  ibid.

148  In this connection, it is useful to recall a recent UNCTAD definition on state contracts, which include not only contract concluded by a state, but also contracts entered into by ‘an entity of the State, which… may be defined as any organization created by statute within a State that is given control over an economic activity’. See UNCTAD Series on issues in international investment agreements: State Contracts (UNCTAD/ITE/IIT/2004/ 11) 3.

149  ibid.

150  Art. 3, EJVL; Art. 5, CJVL. For further details on the approval process, see Shan, ibid, pp. 123–36.

151  France: Court of Appeals of Paris Decision in Arab Republic of Egypt v Southern Pacific Properties, Ltd et al (Appellate Review of Arbitral Awards between States and Private Parties), 23 International Legal Materials (ILM) 1004, 1057.

The English Court of Appeal reached a different conclusion in Svenska Petroleum Exploration AB v Government of the Republic of Lithuania and another (No 2) [2006] EWCA Civ 1529. The Lithuanian government although not a party to the JV added this rubric to the end of the contract confirming that it: ‘hereby approves the above agreement and acknowledges itself to be legally and contractually bound as if the government were a signatory to the Agreement.’ An ICC tribunal found that Lithuania was essentially bound by the JV and the Court of Appeal upheld the award as it was clear that the government intended to go beyond mere approval of the JV.

152  The Implementing Regulations of EJVL, Art 4.

153  The Implementing Regulations of CJVL, Art 9.

154  Contract law of the People’s Republic of China, Art 54 (2).

155  This factor was interpreted by the ICC tribunal as signalling the government’s willingness to be bound by the contract and become a party to it, but was subsequently rejected by the Paris Court of Appeal, which held that:‘even if it is not common for a supervisory authority to affix his authorization directly on the document submitted for his supervision, the exceptional nature of the negotiations in question could be sufficient to explain this circumstance’ and that ‘on the contrary, it should be emphasized that the parties carefully separated their signatures and that the Minister’s signature was affixed separately and clearly placed at the end of the contract’.

See International Chamber of Commerce Court of Arbitration: Award in the Arbitration between S.P.P. (Middle East) Limited, Southern Pacific Properties Limited v the Arab Republic Of Egypt, The Egyptian General Company for Tourism and Hotels (March 11, 1983), 22 International Legal Materials (ILM) 752, p 766, para 44; and France: Court of Appeals of Paris Decision in Egypt v Southern Pacific Properties, Ltd et al (Appellate Review of Arbitral Awards between States and Private Parties), 23 International Legal Materials (ILM) 1004, 1058.

156  MOFTEC (now MOFCOM) Notice on the Adoption of the New Version of the ‘Certificate of Foreign Invested Enterprises of the People’s Republic of China’, adopted by the MOFTEC on 5 October 1993, which attaches a standard Certificate of Approval.

157  In this connection, it is interesting to note that the ICC tribunal in the SPP v Egypt case has attempted to set out certain specific obligations that the Egyptian government had committed by the signature of approval of the Minister of Tourism: ‘By the signature of the Minister the government undertook the following obligations:

  1. 1.  It reaffirmed in the context of the redefinition of the Agreement between SPP and EGOTH the support of the government promised in the September Agreement.

  2. 2.  It committed the government to the support of the project as defined in both Agreements.

  3. 3.  It consequently committed the government not to take any steps which would prevent that project being carried through to completion.’

Whilst it is commendable to make effort to clarify such obligations, it perhaps has gone a step too far in subjecting the host government to such an extensive list of obligations, particularly those under item Nos. 2 & 3. See International Chamber of Commerce Court of Arbitration: Award in the Arbitration between S.P.P. (Middle East) Limited, Southern Pacific Properties Limited v Egypt, The Egyptian General Company for Tourism and Hotels (March 11, 1983), 22 International Legal Materials (ILM) 752, p. 766, para 46;

158  As can be seen from Table 1, by the end of 2005, there have been 317,438 JV project and hence at least the same number of JV contracts that have been signed between foreign and local JV partners in China.

159  Art 2.2, Kuwait BIT.

160  Art 2.3, United Arab Emirates BIT.

161  A Chen, Monograph on International Economic Law (Higher Education press China, 2002, in Chinese), 642–3.

162  AA Fatouros, Government Guarantees to Foreign Investors (Columbia University Press, 1962), 123–4.

It must be noted that different states adopt different methods of approving foreign investment projects. Whilst some countries, such as China, distance themselves from direct involvement in the JV contractual relationship, other countries tend to be substantially involved therein. For example, in some African states, important foreign investment projects are subject to the same approval procedures as international treaties. In other African states such as Ghana, the review and approval process does not only involve passive assessment of the eligibility of the projects, but also positive suggestions and proposed changes, which would amount to ‘a kind of agreement between the state and the investor’, as described by Fatouros. Indeed, the Capital Investment Act of Ghana requires that the approval granted by its Foreign Investment Commission be transformed into an official agreement between the foreign investor and the Ministry of Finance. Ghana: Capital Investment Act 1963, Section Z(3), as cited in M Yao, Comparative Foreign Investment Law (Wuhan University Press, 1993, in Chinese), 557.

163  Royal Decree of 30 May/23 June 1956, concerning the approval of an investment on the exploitation of asbestos in Greece by an American company, Kennecott Copper Corporation, as cited in Fatouros, ibid, 124 fn 219.

164  ibid, 124.

165  ibid, 124–6.

166  ibid.

167  The Implementing Regulations of the Law of Mineral Resources define the right to explore mineral resources within the prescribed scope of the licence (contract), whereas the latter refers to the right to exploit and acquire mineral resources within the prescribed scope of the granted licence (contract). Such definition would be helpful in defining the two terms. See the Implementing Regulations of the Law of Mineral Resources, at 6.

168  REOFF, Art 6.

169  ibid.

170  For example, CNOOC owns 51% interests in the Penglai 19–3 oilfield, while Phillips China Ltd acts as the operator. See ‘China’s largest offshore oilfield is in production’ China Ocean News (in Chinese), 7 January 2003; Zhiguo Gao, above, 167.

171  Zhiguo Gao, ibid, 169.

172  ibid.

173  J Yu, International Investment Law (Law Press China, 2003, in Chinese) 98–9; M Yao, International Investment Law (Wuhan University Press, 1987, in Chinese), 212–13.

174  Yu, ibid.

175  K Zou, above, 348.

176  Wintershall A G et al v Government of Qatar (1989), Partial Award on Liability of 5 February 1988, 28 ILM 795 (1989).

177  UNCTAD Series on issues in international investment agreements: State Contracts (UNCTAD/ITE/IIT/2004/ 11) at 3.

178  Another form of concession agreement is arguably track land development contracts between a foreign investor and a local land administrative authority. The governing laws are the Interim Me