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PROCEDURE AND PRACTICE OF FOREIGN INVESTMENT
LAWS IN PAKISTAN AND ITS DIVERGENCE WITH
CHINA AND MALAYSIA
By
MUHAMMAD KHALID
Thesis Submitted to the Faculty of Social Sciences in Partial
Fulfillment of the Requirement for the Degree of Ph.D.
School of law
University of Karachi
Karachi, Pakistan
(2016)
CERTIFICATE
This is to certify that the present work entitled, “Procedure and Practice of
foreign investment laws in Pakistan and its divergence with China and Malaysia”
has been carried out by Mr.Muhammad Khalid under my supervision, and is hereby
approved for submission to the Faculty of Social Sciences, University of Karachi, in
partial fulfillment of the requirement for the degree of Ph.D. (Law).
The work has been found to comply with the prescribed benchmarks.
Prof. Dr. Justice (Retd.) Ghous Muhammad
Supervisor and Dean/Director, School of Law, University of Karachi.
ii
DECLARATION
I hereby declare that this thesis is the result of my independent investigation, except
where I have indicated my indebtedness to other sources. It has not been accepted in
substance or in part for any degree, and is not being submitted concurrently in
candidature for any other degree.
Muhammad Khalid
Ph.D. Research Scholar School of Law, University of Karachi.
iii
ACKNOWLEDGEMENT
First of all, I thank to Allah Almighty, the most gracious and most merciful for
helping me complete this unique research work. None of this would have been possible
without the guidance and encouragement of my supervisor and mentor, Prof. Dr. Justice
(Retd.) Ghous Muhammad. This thesis represents the culmination of years of work, and
writing it has been challenging yet a satisfying experience. I also thank to Mr.Tansif-ur-
Rehman (Study Area of Europe) for their valuable feedback and time in mentoring and
helping me whenever I need guidance and help and they did not hesitate to help me out.
Particularly, I also owe a debt of gratitude to the people who supported me in this
endeavor.
iv
DEDICATION
I dedicate this work to my parents, children (Muhammad Ali and
Areesha), my sibling (Tariq Hussain, Muhammad Arshad and
Muhammad Irshad), who tolerated my absence patiently during my
research work and to all those intellectuals and researchers, who
are participating and sharing their knowledge to make this world
prosperous regardless of the race, region, and religion.
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ABSTRACT
Foreign investment law is an emergent new law field, in which legal framework
over global investments are discussed. The country of origin from where the investment
is coming or originated is called as the ‘home’ country, whereas the recipient country of
that investment is called as the ‘host’ country. Foreign investment law comprises the very
principles of customary international law and international investment treaties involving
the economic relations of two countries. One important subject in this field of law is the
multinational agreements between the countries, like the Energy Charter Treaty (ECT)
and Bilateral Investment Treaties (BITs).
This study primarily relates to examine the investment laws and its procedure of
three South Asian countries, i.e., Pakistan, China, and Malaysia - as to how foreign
investment has contributed towards the development of these respective countries. In the
first Chapter, brief introduction encompassing different definitions, concepts, and
principles underlying this field of law are examined. Under the study, the international
investment regime is explored, i.e. characteristics, types of international investment laws,
and international institutions dealing with the investment laws. Core issues like the
interpretation of bilateral investment treaties and internationally recognized protection
clauses are also reviewed.
The study critically examines the vires of Pakistan investment laws and procedure
keeping in view of the above cited principles of international investment laws and as to
how by promulgating more investment friendly laws, the investment landscape can be
changed. Later on, bilateral investment treaty regimes of Pakistan and its economic
relations arising therefrom are focused in great detail. The study reveals that Pakistan has
a weaker international investment regime due to which its economy is under pressure
from undeliberated BITs that were signed by the different government officials without
looking into the contents of these agreements.
The study further reveals that Pakistan should develop its own Bilateral
Investment Treaties Model instead of following the infested Bilateral Investment
Treaties, that need an immediate revocation. Analyzing the international investment
vi
regime of China and Malaysia, the study suggests that there is a linkage between the
overall investment environment, i.e. prosperity, law & order situation, natural resources,
as well as investment in these countries, which helped them to achieve the investment
gradually and steadily. Both China and Malaysia are taking full advantage of BITs
executed with other countries. The study also highlights that for attracting the foreign
investment, Pakistan should also review its national laws on investment and more focus
on friendly bilateral investment treaties regime that ought to protect both Pakistani
interest and interests of investors.
The respective study is mainly analytical, thematic, and evaluative in nature, and
includes an interpretation of available empirical, historical, and interpretive literature on
the subject of investment law. This study involves qualitative and quantitative and
exploratory methods of research.
Keywords: Foreign Investment Laws, Investment Arbitration, Bilateral Investment Treaties,
Alternative Dispute Resolution, Qualitative.
vii
viii
TABLE OF CONTENTS
Approval Certificate ii
Declaration iii
Acknowledgement iv
Dedication v
Abstract (English) vi
Abstract (Urdu) viii
CHAPTER 1
INTRODUCTION
1.1 Concept of Foreign Direct Investment 3
1.2 History of Foreign Direct Investment 4
1.3 History of International Investment 8
1. Period before 1950 8
2. Period from late 1950 to early 1970 8
3. Period from early 1970s to Mid of 1990 9
4. Period from Mid 1990 to present 10
1.4 Influence of National Laws on Investment law 12
1.5 Features of International Investment law 19
1.6 Kinds of Foreign Direct investment 20
1.7 International Investment Agreements 24
ix
1.8 Bilateral Investment Treaties 35
1.9 Protection Against Expropriation 38
1.10 Preferential Trade and Investment Agreements 43
1.11 Taxation Agreements 45
1.12 History of International Investment Rulemaking 47
1.13 Investment Policy framework for Sustainable Development 48
1.14 Effects of BIT on Developing Countries 49
1.15 Center for Settlement of Investment Dispute (ICSID) 54
1. Historical background 56
2. Procedural support of ICSID 58
1.16 United Nations Conference on Trade and Development 59
1. Working of United Nations Commission for International Trade Law 61
2. Functions of United Nations Commission for International Trade Law 61
3. Conventions of United Nations Commission for International Trade Law 62
4. Model Laws of United Nations Commission for International Trade Law 63
1.17 International Chamber of Commerce 65
1. Membership 66
2. Governing Bodies of ICC 66
a) World Council 66
b) Executive Boards 66
c) International Secretariat 66
x
d) National Committees 66
e) Finance Committees 67
3. Dispute Resolution at ICP 67
4. Best Practices of rulemaking, policies and business 68
5. World Chambers Federation 69
6. ICC Special Projects and initiatives 70
a) ICC Publications 70
b) ICC Commercial Crime Services 70
c) Role in Combating counterfeiting and Piracy 71
d) ICC business World Trade Agenda 71
e) ICC Research Foundation 72
CHAPTER 2
FOREIGN INVESTMENT LAWS AND PROCEDURE OF PAKISTAN
2.1 Introduction 73
2.2 Foreign investment Laws enforced in Pakistan 74
1. Foreign Private (Promotion and Protection) Act 76
2. The Protection to Economic Reforms Act 77
3. Board of investment Ordinance 77
4. Arbitration (international Investment Disputes) Act 78
5. Recognition and Enforcement (Arbitration Agreement) and Foreign
Arbitral Awards) Act
80
xi
6. The Special Economic Zones Act 81
7. Investment Policy 85
8. Investment Policy 87
2.3 International Agreements and Bilateral Investment Treaties of Pakistan 90
2.4 Famous Pakistani cases at ICSID 99
2.5 The International law guarantees contained in Pakistan-BITs 101
2.6 Model BIT of Pakistan 116
2.7 Pakistan vis-à-vis International investment Law 117
CHAPTER 3
CHINESE FOREIGN INVESTMENT LAWS AND PROCEDURE
3.1 Chinese Foreign Investment Laws 119
1. Overview of Chinese legal Regime for Investment 121
2. Guiding the Directions of Foreign Investment Provisions 122
3. SINO Foreign Equity Joint Venture Law 124
4. Regulations for the Implementation of the law on Sino Foreign Equity
Joint Ventures
126
5. Detailed Rules for the implementation of the law on Sino Foreign
Cooperatives Joint Ventures
129
6. Law of the Peoples of Republic of China on wholly Foreign Owned
Enterprise law
134
7. Detailed Rules for the implementation of the law on the Wholly Foreign
Owned Enterprises
135
xii
8. Measures on liquidation Procedures for Foreign Investment Enterprises 139
9. Provisions for Alteration of investor’s equities in Foreign Funded
Enterprises
142
10. Interim Provisions for submission and approval procedures on electric
power project invested directly by foreigners.
143
11. Rules on procedures for examination and approval of foreign
investments on inventory assets.
144
12. Detailed Rules of the Ministry of Foreign Trade and Economic
Cooperation (MOFTEC) an approval and control of Resident
Representative offices of Foreign Enterprises.
144
13. Provisional Regulations governing investment within the Territory by
Foreign Investment Enterprises.
146
14. Provisional Regulations on the establishment of Foreign Funded Joint
Stock Companies Ltd.
147
15. Several regulations regarding the change of ownership interest of the
investors in Foreign Investment Enterprises.
148
16. The law of the People’s Republic of China on Chinese Foreign Joint
Ventures.
149
17. Administrative Regulations on Foreign Invested Telecommunication
Enterprises.
150
3.3 Regulators in China 151
i. China Investment Promotion Agency 151
ii. China Council for Promotion of International Trade 154
iii. Ministry of Commerce of the People’s Republic of China 159
xiii
3.4 International Investments Agreement and Bilateral Investment Treaties
of China
162
1. Chinese Bilateral Investment Treaties: Arbitral Progress and Problems at
ICSID
164
2. Chinese Free Trade Agreement 167
3. China’s Model BIT 167
4. Chinese Arbitration Cases under BIT 175
3.5 China vis-à-vis International investment law 177
3.6 Promotion of inward FDI by China 179
3.7 Factors behind China’s investment Treaty Program 180
3.8 Legal Protection to FDI In China 181
3.9 Chinese Investment Policy 183
CHAPTER 4
MALAYSIA FOREIGN INVESTMENT LAWS AND PROCEDURE
185
4.1 INTRODUCTION 185
1. Economy 186
2. Foreign Investments Laws Enforced in Malaysia 187
3. Malaysian Investment Policy 194
4. Model BIT of Malaysia 197
5. International Agreements and Bilateral Investment Treaties of Malaysia 200
6. Malaysian Investment Development Authority (MIDA) 205
xiv
7. Legal Protection clauses to FDI under Malaysian BITs 207
8. Famous Malaysian Cases at ICSID 227
9. Malaysia vis-à-vis International investment Law 230
CHAPTER 5
CONCLUSION AND RECOMMENDATIONS
231
References 241
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CHAPTER 1
INTRODUCTION
“Foreign Direct Investment (FDI)” is an interesting subject involving investment
made by international companies into third countries intended to gain profit on these
investment and thereby contribute towards prosperity, unemployment and alleviation of
poverty. It is also responsible for creation of new jobs in host countries. Some of
literature on the subject suggests that international investment is good source for
development of technology-starved countries, where expertise and technological
advancement from developed countries are transferred. It is also called component of
country’s national accounts. Many legal experts defined “FDI” as a procedure whereby
nationals of one country (origin country) acquires the assets of another state for having
production and delivery of finished good of the firm, which according to international
investment theory, is strong and valuable source for host countries (Moosa, 2002)1.
Overall, “FDI” are of two kinds (The Wikipedia, Free Encyclopedia, 2012)2 i) “inward
FDI” and ii) “Outward FDI”. Both of them are part of “net FDI inflow”. According to the
manual of “International Monetary Fund’s Balance of Payments”, FDI is defined to be as
“an investment that is made to acquire the lasting interest in a firm or an enterprise
operating in the county other than investor, thereby, the investors have effective voice in
management of firm/enterprise”. The flow of “FDI” is usually from developed countries
to host countries, who are normally developing third world countries. The affect of “FDI”
on host country results into improved production of domestic facility. Comparing the
traditional definition of “FDI” with emergent one due to rapid changes in law and
technology, the “FDI” has become a completely transformed terminology3. As per
International investment theory, these investments are responsible for growth in human
development, creation of jobs, expansion of economy of host state and bringing in expert
1 Moosa, I.A (2002). Foreign Direct Investment: Theory, Evidence and Practice. (New York: PALGRAVE). 1-2 2 The Wikipedia, Free Encyclopedia. (2012, December, 28). Foreign Direct Investment. Retrieved The Wikipedia website: http://en.wikipedia.org/wiki/Foreign_direct_investment 3 Ibid, note 2
1
know-how and management skills, which contributes to transformation of socio-
economic fabric of recipient state. It also covers managerial skills, knowledge of joint
venture. As compared to short term investment, long term investment is significantly
essential in “FDI”. It is different from “Portfolio investment”, which is a short term
investment and provides a high return of securities4.
Foreign Direct Investment is key element in evolving international economic
integration. “FDI” provides for direct stable and long term linkages between two
economies. It also advances the competitiveness of both home and host countries. It is
also essential to the recipient state in promoting its product wider and more open
globally. “FDI” in addition to its positive development and long lasting effect on
economics is also important source of capital for both host and home countries (OECD,
2008)5.Foreign investment can take the form of official and non-official flows. The
phenomena of the digital era especially for developing countries are there to rise more
expectation amongst these countries. These countries have to be closely linked with the
developed world through digital revolution as it has shrunk the role of the govt. and
private person. By that, more problems are being created in managing FDI. The circle of
FDI can be understood through following illustration:-
Investment, know how, technology, management
Profits, royalties and fees
Investor Receiver
(Domestic) (Foreign)
4 Ibid, note 2 5OECD:Organization for Economic Co-operation and Development. (2008). OECD Benchmark Definition of Foreign Direct Investment. Fourth Edition. OECD Publications.
2
1.1 CONCEPT OF FOREIGN DIRECT INVESMENT
According to International Monetary Fund, there are certain key concepts of FDI.
They categorized the concepts of FDI into three i.e. 1) FDI capital flows, ii) FDI Stocks
and iii) FDI investment Income. In FDI capital flows, equity capital covers equity in
branches, voting and non-voting shares in subsidiaries and other capital investment,
which includes investment in machinery, plants, raw material and technical know-how.
According to this first concept, the direct investor can increase its investment equity in
corporations through re-investment. By doing so, the investor is amputating its share in
already invested capital consciously with a purpose to increase its investment in direct
investment enterprise (Patterson et al, 2004)6. Likewise, in FDI stocks, the increase and
decrease of capital flows are dependent upon the stocks. The IMF is also of the view that
price rate change and other factors such as reclassification also contribute significantly
towards FDI stock (Patterson et al, 2004)7. Patterson et al. (2004) further say that, the
direct investment capital includes income on equity and income on debt. Income on
equity is further sub-divided into income on distributed income and reinvested earnings
and undistributed branch profits8. On the other hand, under the international investment
law enforced around the world, the concepts are mostly derived from the sources of
International Law or International Economic Law. These concepts are based on
customary international law, international investment agreements, ICSID convention and
investment treaties entered from time to time by the states to protect the investment
enterprise (OECD, 2008)9. FDI takes many form like, direct acquiring of a firm, facility
construction or investment in a strategic partnership with a corporation in host country,
whereby injecting technology is intended. In the last decade, FDI played a pivotal role in
streamlining the internalization of business across globe. It had impacted the regulatory
framework of international business arena. Due to its role, the rapid changes were seen in
size, scope and methods of FDI.
6 Patterson, N., Montanjees, M., Motala, J., and Cardillo, C. (2004). Foreign Direct Investment. Retrieved https://www.imf.org/ external/pubs/ft/fdi/2004/fditda.pdf 7Ibid, note 8. 8Ibid, note 8. 9 OECD:Organization for Economic Co-operation and Development. (2008). International Investment Law: Understanding Concepts and Tracking Innovations. OECD. Retrieved. http://www.oecd.org/daf/inv/internationalinvestmentagreements/40471468.pdf
3
Proponents of FDI propagates that transfer of investment flows in two way are
beneficial for both origin country and recipient state, whereas the opponent of the FDI
states that multinational conglomerates yield great power over small and vulnerable
countries and are not good for local competition (Graham, Spaulding, 2004)10. Law and
regulations governing FDI can be determinants of FDI as to how beneficial it is, while
preventing or minimizing the damage to the host country (Bhattacharayya et al, 2012)11.
Normally, these legal regimes consist of following component:-
1. Regional free trade agreements;
2. Multilateral and bilateral investment treaties;
3. Specific investment legislation and regulations; and elements of domestic
commercial, antitrust, intellectual property, tax, labor and Environmental laws.
According to International regulatory regime of FDI, the key features in this
regime include, a) Incentives to invest, b) Investor protection measures, c) Protective
measures, approval criteria and notification requirements and d) Compliance with free
trade agreements12.
1.2 HISTORY OF FOREIGN DIRECT INVESTMENT
After Great First World War, the USA alone was the largest importer of the
foreign capital. In the words of eminent business historians, the US was the greatest
debtor country in the history in the period of 1874 to 1914, despite its rise as major
lending countries in the international capital market at the end of that period. Modern
British historians have debated investment inter-regional investment between provinces
and London. On the other hand, the American historians talked about inter regional
investment to East Cost, Midwest to mountain and Pacific region. It is believed that the
US was one of the modern debtor in the nineteen century and thereafter, the US became
10Graham, J.P and Spaulding, R.B. (2004). Understanding Foreign Direct Investment, (FDI). JPG Consulting. retrieved http://www. going-global.com/articles/understanding_foreign_direct_investment.htm 11Bhattacharayya, S. Slaughter and May.(2012). Legal Regimes governing FDI in host countries. Advocates for International Development. retrieved http://a4id.org/sites/default/files/user/documents/FDI%20Legal%20Guide.pdf 12Ibid, note 11
4
modern creditor. After World War II, the world has seen intensity in international
investment, which lateron transformed itself into different kinds of investment.
According to Experts, both World War I and World II saw huge type of inflows and
outflow of investment into different country. After World War I, many restrictions were
imposed by European countries on investments. The mid of 1920s, foreign investment
increased in US as post World War I, normalization of economic order in Europe
returned and US greatly took advantage of the situation and its growth witnessed
revitalization. After start of World War II, the European Countries just like previously
imposed restrictions on capital movement. They also commandeered the investments of
US govt. and their nationals and used it for funding ammunition purchases. The same
practice was also adopted by German govt. and its corporations as they did not forget US
treatment with their investment during World War I. German used to sell off, abandon
and conceal their US investment in other European Countries i.e. Switzerland, Holland
and Panama (Wilkins and Mira, 2004)13.
After Second Word Ward, the World FDI was dominated by US as the World
started recovering from destructions brought by World War II. The US was responsible
for three quarters of FDI including reinvestment of profits on their investment. This
paved the roots of modern FDI. FDI of 1960s and 1970s were politicized. Some of
exponents are of the belief that foreign investment triggered exportation of jobs,
undertaking of a major campaign to reform the tax provisions affecting foreign direct
investment. After promulgation of “the Foreign Trade and Investment Act of 1973”,
which was enacted for elimination of tax credit and tax deferral, the President Nixon’s
Administration and influential congress members of both parties and lobbying
organization started lobbying in favor of the multinationals. The strong lobbying
counterattack of multinationals caused dent to first challenge to their interest.
One of the most remarkable phenomena during the last two decades was increase
in international investment agreements. The limit of agreements reached to 2500
agreements and out of them 2400 are bilateral investment treaties. International
investment largely depends upon these international investment treaties. This investment
13Wilkins and Mira, (2004).The History of Foreign Investment in United States, 1914-15.Harvard University Press.
5
existed even in eighteen century. The Scholars divided the history of international
investment into three phases 1) “The Colonial Era”, 2) “Post-Colonial Era” and 3)
“Global Era”. In the first phase, the period starts from Eighteen Century and end till
Second World War. The second phase starts after Second World War till 1990 and in
third phase, the period starts from 1990 till present and is in continuation (Kenneth
J.Vandevelde)14. Prior to Second World War, there was no concept of protection of
foreign direct investment. Most of the agreement concerned with establishing trade
relations. In Eighteen century, the US started to conclude the bilateral treaties in the name
of “Friendship, Commerce and Navigation (FCN)” (Kenneth J.Vandevelde)15.
The rapid international investment paved the way of international investment law,
which primarily based upon the treaties law. The international investment law is derived
from agreement and treaties clauses. It is also seen that by the passage of time, the
countries inserted some of clauses, which protected their interests. The international
investment legal frame work consist of vast international investment agreements that are
supplemented by International law. It is misunderstood that the international investment
is treated as adjunct to trade, rather the international investment has broadened itself from
multinational corporations who only were concerned with their raw material being
exported to countries. These countries believed that the efficient allocation of capital is
important to economic growth and sustainable development (Moltke K.V., 2000)16. Till
the end of the 19th century, foreign direct investment was being undertaken by enterprises
both large and small with a wide range of concerns. The option of investing in another
country has become a normal part of strategic growth plans for enterprises. Individual
investors are now seeking investment opportunities outside their own currency region as
a matter of course. And mutual funds make these kinds of investments available to small
investors(Moltke K.V., 2000)17. The large investment coming in and going out, created
the international investment regime in international economics. It also raises the question
of sustainability of these investment as to how they were to be protected and highest
14Kenneth J. Vandevelde.,(2015, April 04). A Brief History of International Investment Agreement. University of California, Davis. Retrieved http://jilp.law.ucdavis.edu/issues/volume-12-1/van5.pdf 15Ibid, note 14 16Moltke K.V. (2000). An international investment regime, issues of sustainability. International Institute for Sustainable Development. Retrieved from https://www.iisd.org/pdf/investment.pdf 17Ibid, note 16.
6
returns would be ensured. On the large scale, investment by foreigner concerned their
govt. for protection of their national and their investment.
Globalization is the new philosophy for entrenching itself into modern
international economic order. It can hardly be resisted and its presence is felt in
everyone’s life. The main features of globalization is ever increased cross-border
economic activities i.e. investment and trade. As a result of globalization, both developed
and developing countries are exporting and importing. For FDI, political issues, culture,
legal systems remained no longer hurdles. Infact, it would not be wrong to say that the
economic advancement of almost all countries of world is interlinked with inflows of FDI
(Wang, G., 2015)18. By now, 80,000 multinational enterprises with 100,000 affiliates are
working around the world in different countries having different multiple cultural,
religious and social backgrounds. There are 3000 bilateral and multinational investment
treaties enforced between different developed and developing economies. With its
success rates, more and more international treaties and agreements are being executed as
every country has urge to ripe the fruit of FDI.
Investment has various forms, which can be divided into domestic investment and
international investment and then “Foreign Direct Investment” & “Foreign Indirect
Investment”. FDI is mainly concerned with excess shares in the enterprises by foreign
investor than local investors. In another words, one investor with his investment intends
to invest in the company or corporation set up in another country and then exercise
assertive control over them is called “Foreign Direct Investment Company”. It is
important to highlight that affective control by foreign investor over company’s internal
management and into decision making power is also considered as investment (IMF.,
1964)19. The effective control has different views in different national laws of countries
like USA. This means that the investor ought to have at least 10% of total shares in the
corporation, otherwise, the effective control cannot be considered. The lowest shares
percentage is 5% in some of countries, whereas in some of countries the lowest
18 Wang, G. (2015). International Investment law: A Chinese Perspective. Routledge. 1 19 IMF. (1964).Balance of Payments Yearbook. IMF. Washington, D.C., Vol.16, 10
7
percentage is set to 50% (OECD, 2008)20.
1.3 HISTORICAL VIEW OF INTERNATIONAL INVESTMENT
The modern global investment started from early state of capitalism, when “East
Indian Company”, “The Hudson’s Bay Company” were set up to achieve certain
purposes. Amongst them are cheap labor, the potential of raw materials, while rest aimed
to explore potential markets21. The latest picture of foreign investment emerged post
World War II, in which phase many former colonies acquired independence. The History
of foreign investment is divided into following four phases: -
1) Period before 1950
2) Period from late 1950 to early 1970
3) Period from early 1970s to mid of 1990
4) Period from mid-1990 to present
1) Period Before 1950
In this phase, investment were made amongst Western Countries between
themselves. These investment were directed from US to Europe and Canada, whereas
Western European Countries put their efforts to reconstruct their war torn economies and
they could not make outward investment. At that time, most of US and UK transnational
companies “TNCs” were engaging into investment in overseas international enterprises
raw material projects (OECD, 2008)22.
2) Period from Late 1950 To Early 1970
In this phase, extension of foreign investment was rapid development as two
regional economic blocs were emerging i.e. the European Common Market and the
European Free Trade Union in 1958 to 1960. Furthermore, Western European Countries
and Japan further liberalized their domestic restrictions on International investment. This
20 OECD: Organization for Economic Co-operation and Development. (2008). OECD Benchmark Definition of Foreign Direct Investment. Fourth Edition. OECD Publications. 39-57 21 Lowerfield. F. A and Bender. M. (1982). International Private Investment. New York. 1 22 Ibid, note 20, page 2
8
significant move further gave a stimuli to investment. For instance, in 1961, the former
West Germany abolished restrictions on German Steel Industry, while Japan started
concentrating on outward investment in or about 1967. In this period, the major 50%
share was of US, while Japan captured 16% of total world foreign investment (Richard
D., 1983)23.
3) Period From Early 1970s To Mid Of 1990
This phase comprises of period from early 1970 to mid-1990. During this period,
Japan and Western Europe emerged as remarkable economies that intended to
counterbalance US, which weakened US influence in world economy. This phase also
saw US share decrease in global investment, whereas Japan and European Countries
share increased in FDI inflows in US. This change was due to US abandonment of the
obligation to exchange US dollars for gold, which significantly depreciated the US
dollars in international market. This depreciation was an opportunity for foreign
investors, who bought US enterprises at a lower cost and thereafter started manufacturing
cheapest products to export them. During this period, global investment outflows from
former West Germany and Japan gained success by fivefold and four fold respectively24.
To sum up, it would not be wrong to say that, before 1970s, global investment
was made within developed world. Canada in this period remained as one of ideal
developed country for global investment, it attracted 14% of the total foreign investment.
At the same time US accepted more and more FDI. On the other hand, UK and other
Western European countries also become important FDI in host countries. While
comparing, one can reach at the conclusion that Japan ranked at the top of the developed
countries that hosted less amount of FDI due to their domestic policies that did not
encourage FDI. If any foreign investors intends to enter Japanese market had to do so in
the form of a joint venture or technology transfer.
The geography and history of late 1970s also played an important role. The rapid
investment was seen in geographically neighboring countries, such as US and Canada of
23 Richard D. (1983). International Business and Multinational Enterprises. Irwin, Inc. Hoewood, Illionios.2 24 Ibid, note 23. 28
9
the Western European Countries. Investors from UK and France tended to invest in
countries who shared common historical connections with their home countries including
British colonies as commonwealth countries and former French countries. Investment
from development countries to developing countries concentrated in oil exporting
countries and tax havens. The “Tax Heaven” is terminology used for countries, who
attracts FDI by means of low tax rates. These countries included Brazil, Mexico,
Argentina, Peru, Trinidad and Tobago, India, Malaysia, Singapore, Hong Kong and the
Philippines.
Another significant feature of this period was investment was made among the
developed, developing and socialist countries alike. By this, both developed and
developing countries gained a lot as economic interdependence of international economic
community was developed while the developing countries has learnt maturity in terms of
protecting their state sovereignty. China has learnt from the economic development of
world that in order to develop their domestic economies, international cooperation was
necessary. After 1980s, the remarkable global investment was seen as the total
investment outflows from market economies reached US $ 500 billion per year. Eastern
European Countries established more than 700 manufacturing and trading companies in
other countries by 1976 (UN, 1978)25.
In this period, the host countries also started investing in other countries. For
example, 1980, Kuwait Investment Authority acquired 10% shares of the Volkswagen
Corporation subsidiary in Brazil as well as 14% and 25% of shares of German
Enterprises Benz Corporation and Korf Sthl Steel Co. Other countries like Brazil, Hong
Kong, India, Mexico, the Philippines and South Korea also invested overseas.
4) Period from Mid-1990 To Present
This phase is latest phase in which modern techniques of FDI were adopted. The
international community in this phase is characterized by widespread economic
integration. This economic integration is attributable to many elements including
Information Technology that changed many traditional concepts and customs. In this
25 United Nations. (1978) United Nations, Transnational Corporations in World Development UN. New York. 53.
10
period, World Trade Organization (“WTO”) was also established. The other regional
organization as well as energy charter treaty, which has legalized, institutialized and
internalized the changes. Now states border is no longer a barrier to global investment.
This period has also seen a profound development of FDI globally. From 1996 to 2000,
global FDI inflows increased rapidly like never before. It is estimated that historical peak
of US$ 1413 billion was seen in 2000. FDI inflows were 20 times higher than in 1980.
The annual growth rate of FDI was 16% higher than world GDP (Kekic and P.Sauvant,
2006)26. In 2003, FDI saw a 22% increase in FDI. According to “UNCTAD”, the total
value of global FDI inflows increased to US$ 1450 billion in 2013, while this figure grew
to US$ 1600 billion and US $ 1800 billion in 2014 and 2015 (UN, 2013)27.
The developed countries remained as major origins and destinations of global
FDI. On the other hand, the investment inflow to developing countries has also improved
substantially. Only in 2006, more than 90% of FDI went to developing countries and 90%
cross border merger and acquisition were concluded by firms from other developed
countries (UNCTAD, 2006)28. In 2012, investment flows to developing countries were
recorded at 52%. The percentage of all FDI, while with developed countries was recorded
at 42% (UNCTAD, 2013)29. The comparison of FDI outflows from developing countries
in 1985 increased to US$ 462 billion in 2010, and it accounted for 32% of world total
investment (UNCTAD, 2012)30. In 1990, only six developing countries and transition
economies were participating into FDI. Likewise, South to South FDI has increased
rapidly in last fifteen years. The FDI among developing and transition economies from
US $ 2 billion in 1985 to US $ 60 billion in 2004, which was in the shape of inter-
regional investment (UNCTAD, 2006)31. In the year 2011, further surge has been
witnessed by UNCTAD in FDI outflow from transition economies into extractive
industries in developing countries and it touched 65% in FDI projects of “BRICs (Brazil,
26Kekic.L and P.Sauvant.K (2006). World Investment Prospects to 2010: Boom or Backlash?. The Economist Intelligence Unit Ltd. London. 22. 27United Nation. (2013).World Investment Report, 2013, Global Value chains, investment and Trade for development. New York and Geneva. Retrieved http://www.unctad.org/en/publicationslibrary/wir2013_en.pdf 28UNCTAD. (2006). World Investment Report 2006. New York and Geneva. 87. Retrieved http://www.unctad.org/en/docs/ wir2006_en.pdf 29World Investment Report, 2013. Ibid. note 27. 30UNCTAD. (2012). World Investment Report, 2012. New York and Geneva. Retrieved http://www.unctad-docs.org/files/UNCTAD-WIR2012-Full-en.pdf 31World Investment Report, 2006. Ibid. note 28
11
Russia, India and China)” into developing and transition economies (UNCTAD, 2012)32.
The main source of sharp surge in FDI was due to cross-border mergers and acquisitions
in 1999-2001 and 2004-2005. The value of transnational mergers and acquisitions rose by
88% in 2004 to US$ 716 billion (UNCTAD, 2006)33. The three fourth of total world’s
transnational mergers and acquisition were with developed world within period of 2002
to 2005 (Kekic and Sauvant, 2006)34. In 2005, the companies from France in Western
Europe took the place of US Companies becoming largest investors (Kekic and Sauvant,
2006)35. The worldwide pattern of mergers and acquisitions also dramatically shrank in
2003, 2009 and in 2012, but increases in emerging markets since 2002 (Kekic and
Sauvant, 2006)36. Only 2010, the record number of 5450 mergers and acquisitions were
recorded alone, which accounted to US$ 338 billion; out of these 3644 TNCs accounted
at a value of US$ 216 billion (UN, 2011)37.
All above events in development of FDI are attributable to many elements such
establishment of WTO and advancement of information Technology are key ones.
Furthermore, opening up for more national markets, knowledge economy in domestic
production and progressive liberalization of foreign investment regulations and the steady
and gradual development of international law on foreign investment are also important
reasons for substantial increases and changes in field.
1.4 INFLUENCE OF NATIONAL LAWS ON INVESTMENT
Due to globalization, it is now very difficult to identify as to whether a country is
an investment home country or host country. National laws of countries on investment
also played a pivotal role. These includes national enactments policies, regulations and
can be classified as either restrictive or encouraging so that they may be able to alter the
means of investment as per their design, while making reinvestment or expand its
business would balance the advantages and disadvantages and compare the prospective
32 World Investment Report, 2012. Ibid. note 30 33 World Investment Report, 2006. Ibid note 28 34 Kekic and Sauvant (eds), Ibid. note 26, Table 4. 23 35 Ibid. 22 36 FDI inflows were witnessed to emerging markets economies by means of mergers and acquisitions. Ibid. 23. 37 UN. (2011). World Investment Report 2011; Non-Equity modes of International Productions and Development. New York and Geneva. Annex. Table 1.3 and 1.4. Retrieved http://www.unctad-docs.org/UNCTAD-WIR2011-Full-en.pdf
12
profits to be reaped by its changing strategy. By practice, following factors are
determining factors that can slash cost and enhance productive efficiency:-
1) Reduction in cost of capital, labor, technology and energy
2) Reduction in other costs by adjusting tariffs and import quotas.
3) Increase in post-tax income by giving subsidies, tax reductions and tax
exemptions (Wang G. 2015)38.
Nowadays, every country has desire to encourage FDI, one cannot isolate itself.
They all have the power to review or to terminate foreign investment. The most common
supervisory measures include reviewing foreign investment projects or proposal to know
the true intents of foreign investors. Most developing countries has such provisions in
their national laws. Some developed countries like Australia and Canada have concrete
standards for review of FDI. For example, Canada has enacted Canadian Foreign
Investment Review Act with the aim to review investment regimes.
From prevention of control of foreign enterprises on domestic economies, most
countries restrict mergers and acquisitions of domestic enterprises. The US, Japan,
Canada, Australia and some developing countries like China has established successfully
regimes to review such mergers and acquisitions. However, most countries regulate the
economic activities and if it is felt that restrictions are necessary then they impose
restrictions, which includes, constructions and productions of facilities and material for
national defense, transportation, communications, public facilities, banking, insurance
and public media such as newspaper, radio, stations and televisions broadcaster
facilities39.
Apart from legal and policy restrictions, the regulations of foreign investment
revenues, remittance controls and limitation on payment of service fees by host govt.
could also influence foreign investment. The exchange rate regime of a host country has
directly affected on the structure of foreign investment and the industries involved. If the
38 International Investment Law-A Chinese Perspective. Ibid. note 18. 7 39 The proponent of anti –restrictions measures on foreign investment was some developed countries led by US, who were of view that service industries including banking and insurance should be relaxed and in view of that WTO and General Agreement on Trade in Services were established.
13
domestic currency is over-valued, foreign investments purchasing imported products
would be subsidized by the host countries. Under these circumstances, foreign investors
would more tend to increase imports for the sake of subsidiaries offered by host govt. and
remit their income as profits directly out of the host country.
For attracting foreign investment, many countries, especially developing countries
provides favorable treatment to foreign investors through national laws and
administrative measures. Amongst them, is political and economic situation of the host
country, which is called “Investment Environment”. This also include natural element
like population, market preferences and culture, as well as non-natural element such as
tax regime, the labor market, conditions and restrictions on the activities of foreign
investment. While determining the encouraging or discouraging effect of foreign
investment, the global perspective play an important part. Whether the investment
environment is favorable is largely dependent on comparison with other countries.
Nowadays, most foreign investors are TNCs with independent information analysis and
decision making systems, that allow to adjust their investment strategies according to
changing situations in world. Different policies and measures on foreign investment show
that they must be considered and put into practice to reap the benefits of foreign
investment. Some host countries in order to attract foreign investment offers preferential
loan. Due to these loans, foreign enterprises are in position to invest in high risk fields.
This preference has a bad repercussion on domestic enterprises, who cannot compete
foreign enterprises subsidized by preferential loans and overall economic development of
host country (Wang G. 2015)40.
While attracting foreign investment, many host countries lure the foreign investor
with tax reductions and exemption. While giving such privileged, many host countries i.e.
developing countries place more emphasis on the local re-investments of foreign invested
enterprises because of fact that the investor’s capital are transferred to home country, in
which case, the host countries are at losing end. Due to this reasons, developing countries
want reinvestment in their countries as contingent clause into investment agreement.
40 International Investment Law-A Chinese Perspective. note 18 ibid. 10
14
The host countries may also require the local participation into foreign funded
projects. This is helpful for the foreign enterprises to understand the legal and political
regime, as well as culture of host country. When the foreign investor transfer its real
income to its overseas branches by means of transfer pricing, then the domestic partner
oppose the transfer of real income that can lead to financial loss, which is real concern for
foreign investors for investing in the host countries with requirement of domestic
participation. As per World Bank study, tax reductions and exemptions are the primary
measures taken by host countries to encourage foreign investment, followed by national
treatment. However, the real concerns for foreign investors are as to whether the long
term investment plan can be made and implemented, whether their capital and earnings
can be freely remitted and whether national treatment is provided or not. It is impossible
that there cannot be any conflict between host countries’ promotional policies and
measures and foreign investors’ needs, which concerns can be taken care of by host
countries. International investment is always regulated by both home and host countries
legislations including foreign exchange regulations, laws on equity, and securities
investment, regulations on the extension of loans, the tax regimes and anti-trust laws. In
addition, political risk guarantee provided to the enterprises, investment insurance and the
explanation and publication of agreements and arrangements with foreign countries are
also important for enterprises in the foreign investment decision making.
Foreign Exchange control are adopted by developing countries. Apart from US,
most developed countries had also imposed strict restrictions of foreign exchange flow
after World War II. At that time, US also maintained domestic’s financial policy
restriction on the foreign investment of US enterprises. For example, the “Foreign Direct
Investment Office of US Department of Commerce” had imposed strict restrictions on
extension of loans of foreign investments of US enterprises in developing countries. This
was made, due to US balance of payment problem, which existed at that time. This policy
led US enterprises to shift to European Financial Markets for loans in European
Currencies. Like US, the UK also adopted such policy in its balance of payments problem
in post war era. Resultantly, except for export loans, loans for foreign investment could
not get approval from the UK govt. when balance of payments solved, the restrictions
was gradually abolished.
15
The depreciation and appreciation of local currencies by host countries govt.
would also indirectly influence foreign investment. After World War II, the US $ was
appreciated, which prompted US enterprises foreign investment. Similarly, appreciations
of Japanese Yen in 1980 also encouraged Japanese enterprises to invest abroad to lower
their production costs and maintain their shares in overseas markets. Government
encouragement and restrictions of foreign investment is also reflected in supervision of
other institutions by central bank. All central banks including those of US, Japan, China
and European Countries conduct effective supervisions of commercial banks and other
financial institutions. The banking corporation of Hong Kong stipulates that a bank shall
not lend more than 25% of its capital to any company or individual. As per US
regulations, a member bank or other commercial bank shall not make equity or security
investments in any domestic or foreign corporation or lend to an individual borrower an
amount in excess of 10 percent of its capital. From analysis of above, it is clear that the
domestic banking laws and regulations have a major impact on foreign investment
activities of local enterprises.
Tax regime of investor’s home country is also of great significance to foreign
investment, it can offset any tax preferences provided by the host countries and thus
restrain foreign investment. If the tax is paid to the host country by a local enterprises
engaging in foreign investment is recognized by its home country, that is to say, the tax
paid to the host country can be deducted from the taxes payable in home country and in
that case the enterprises would certainly be willing to invest overseas. Likewise, tax
regime and foreign exchange regulations, the antitrust laws and other similar laws of
investor’s home countries also have significance impacts on global investment. At now,
many national laws apply not only to domestics but also to conduct business in other
countries. For instance, US antitrust law are applicable to all domestic activities as well
as those carried out overseas also have an impact on US market41. Some countries restrict
domestic enterprises from exporting specific products or technology to certain countries
in international investment and trade, especially when they are related to high tech trade.
These restrictions are as a result of strategic security considerations, while others are as a
41See section 6 of the Sherman Antitrust Act of 1890.
16
result of international treaty obligations. This is because of nuclear material and
technology export restrictions. These restrictions are considered as barrier to international
investment by some international investment jurists (Wang G. 2015)42.
Some enterprises invest abroad to manufacture products that would be sold in
domestic market of their country. This is done due to customs system, its tariff rates and
other import related costs. While some countries encourage domestic enterprises to
import raw materials or semi-finished products to alleviate shortages in domestic
supplies. Sometimes, the countries do not encourage investment to import cheap foreign
products to compete with domestics industries in domestic markets. For this, policies and
measures not linked with importers are imposed. The requirement that the govt. agencies
should mainly purchase domestically produced products in an example. The “WTO
Agreement on Govt. Procurement” regulates procurement by signatories’ govt. and their
agencies has an indirect bearing on the investment environment of related countries and
territories.
Most domestic laws on stock exchange require listed companies to disclose their
balance sheets and other critical business information to govt. and the public. In addition,
when investing abroad on loans, the enterprises may have to provide the creditors with its
balance sheet and disclose its financial situation. However, some companies in the host
country are unable to provide more detailed information because of the laws of their
home country or for other reasons. For promotion of foreign investment by domestic
enterprise, some countries have entered into bilateral agreements with host countries
providing political risk guarantee and other guarantees to their domestic investors. “The
US Export Import Bank”, “the US Overseas Private Investment Corporations” and “the
UK Export Credit Guarantee Department” are some of govt. agencies providing such
guarantee (Wang G. 2015)43. These guarantees are provided to eliminate or reduce
political risks for overseas investment companies. The more political risk, the more
preferential loans.
Under International law, it is felt more important to provide political risk
insurance because of fact that the foreign investors do not know the exact nature of things
42 International Investment Law-A Chinese Perspective. note 18. ibid. 13 43 International Investment Law-A Chinese Perspective. note 18. Ibid. 14
17
due to distances between their investment projects and the home country. In such
scenario, the political risk insurance enhance their confidence and therefore, expand their
foreign investment. Likewise, the criminal laws of home countries also play an important
role other than economic laws and regulations on foreign investment. Such as Foreign
Corrupt Practices Act, 1977 in US, whereby bribery directly or indirectly to foreign govt.
officials is made punishable. This legislation also prohibits US companies from excluding
any property from their account books of falsifying accounts in order to cover up
expenses related to corrupt activities. Such provisions of laws are important for
facilitation of foreign investment. On the other hand, in host countries, they are not such
type of legislation. They rather punish the person who is bribed instead the person who is
bribing. If all home countries adopt such measures for enacting relevant laws like US or
international action for concluding international convention to fight against economic
crimes, then there would be better international investment environment and a more level
playing field. For instance, OECD members have concluded the convention on
“Combating Bribery of Foreign Public Officials in International Business Transaction” in
the year 1999 is good example to follow. At present, 39 countries are signatories to the
convention. Through convention, they legislated domestic laws for curbing bribery in
international business activities.
Like transparency in international business transaction, the environmental
protection, security and other issues also affect foreign investment. If the raw materials or
semi-finished goods do not meet the standards required cannot be imported. The financial
institutions and banks of home countries required that the projects for which loan is
applied for do not adversely affect the ecological balance of host countries. Although, the
influence of such laws and regulations on international investment is not clear, but at the
same time, it cannot be overlooked in the decisions making of foreign investment
company investing abroad. Due to economic globalization, and interdependence of
International community, the need is also felt to protect the Intellectual Property rights of
foreign investors. Information age is also changing investment environment and due to
this change, more emphasis is felt to the legal protection of intellectual property rights in
host countries (Wang G. 2015)44.
44 International Investment Law-A Chinese Perspective. note 18 ibid. 15
18
1.5 FEATURES OF INTERNATIONAL INVESTMENT LAW
World investment laws has seen fastest ever development in legal sector over past
decades. New features has evolved which is significantly distinguishable from
contemporary International investment law. These features are formed as a result of
resolving disputes by “International Center for Settlement of Investment Disputes,
ICSID”, an arbitral tribunal established under the convention of 1965, i.e. “ICSID
Convention”. This convention has played incomparable role in investor state disputes
settlement and has gained its importance as one of the most unique institutions for
settlement of global investment disputes. Many Free Trade Agreements (“FTA”), i.e.
“Energy Charter Treaty” and the “North American Free Trade Agreement” (“NAFTA”)
as well as “Bilateral Investment Treaties” (“BITs”) includes provisions that refer the
investment disputes with host countries to ICSID. The jurisdiction of ICSID is not
restricted to its signatories states, but also include countries that did not join ICSID, for
which additional facilities of arbitration of ICSID is provided. More and more countries
have accepted the “ICSID Rules of Procedure for Arbitration Proceedings”. The latest
data shows that in 2013 alone, 158 states has acceded to ICSID convention (ICSID,
2012)45. Till February, 2014 a total of 461 cases were registered under the convention
out of which 278 had been completed with an additional 183 cases pending decision
(ICSID, 2012)46.
ICSID also administered 67 investor’s state disputes under “United Nations
Commission on International Trade Law, UNCITRAL”) rules between mid-2004 and the
end of 2013. There are also other International Arbitral Institutions involved in resolving
investment disputes. These include as under:-
1) “International Chamber of Commerce”
2) “The Stockholm Arbitration Court”
3) “Permanent Court of Arbitration”
45International Centre for Settlement of Investment Disputes. (2012, May 7). Contracting States. Retrieved http://icsid.worldbank. org/ICSID/FrontServlet?requestType=ICSIDDocRH&actionVal=Contractingstates&reqFrom=Main 46International Centre for Settlement of Investment Disputes. (2012, May 7). List of Cases. Retrieved. http://icsid.worldbank.org/ ICSID/FrontServlet?requestType=CasesRH&actionVal=listCases
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All above has their own rules for arbitration except Permanent Court of
Arbitration, which adopts the Arbitration Rules of the “United Nations Commission on
International Trade Law”.
1.6 KINDS OF INTERNTIONAL INVESTMENT
There are three recognized types of FDI i.e. “Horizontal Type of FDI”, “Platform
FDI” and “Vertical FDI”. Horizontal FDI is understood to take place when an enterprise
copies its domestic activities at the same stage in a destination state through FDI.
“Platform FDI” means foreign investment taking place in home country to host countries
for exporting finished goods/products into third country. Vertical FDI is defined to be
FDI activities performed by a foreign enterprise through stage by stage in host country
mainstream and downstream. (The Wikipedia. Free Encyclopedia, 2015)47. Whereas,
foreign investments as per international investment Theory falls within following six
recognized categories:-
1) “Commercial Loan”
2) “Officials Flows”
3) “Foreign Direct Investment (FDI)”
4) “Foreign Portfolio Investment (FPI)”
5) “Greenfield Investment”
6) “Privatization”
Commercial loans are principally issued by banks for setting up foreign business
or for development of economic infrastructure to govt. (Globalization 101, 2015)48. The
developing countries are major receiver of this kind of loans as they take in basic
technology and economic boost. These countries are enriched with many raw materials
and unused sources, but they lake in basic technology oriented knowledge to exploit it,
therefore, they apply to commercial loans to many international financial institutions like
IMF, World Bank and Asian Development Bank. Till 1980s, the largest source of foreign
47The Wikipedia. Free Encyclopedia. (2015, Nov 20). Foreign Direct Investment. Retrieved https://en.wikipedia.org/wiki/Foreign_ direct_investment 48 Globalization 101. (2015 November 20). Kinds of Foreign Investment. Retrieved http://www.globalization101.org/what-are-the-different-kinds-of-foreign-investment/
20
investment in developing countries was commercial loans. But later in time, the
commercial loans were seen constant, whereas the global FDI and FPI increased. Alone
from 1991 to 1998, FDI and FPI comprised 90 of the total flows to developing countries
and is continuing so on and so forth (Globalization 101, 2015)49.
Official flows are kind of investment in the shape of development help provided
by developed countries to developing countries. Through officials’ flows, the
development countries not only helping developing countries, but they are also viewed as
friendly developing gesture and long lasting interest to uplift the developing countries.
Foreign Direct Investment relates to global investment in which the investor gets
a long lasting interest in a corporation in host countries. In other words, the investor
invests into developing a factory or corporation and to further add improvements to such
establishment through equipment, properties or plant etc. FDI is considered to be all
kinds of capital contributions i.e. purchases of stock and reinvestment of earnings, which
is one of the significant part of FDI. As per data of UNCTAD, “United Nations
conference on Trade and Development”, the global FDI is expanded by over sixty five
thousands (TNCs) with more than 850,000 foreign affiliates. Earnings on FDI are
obtained through dividends, management fees, retained earning and in the shape of
royalties.
Foreign portfolio investment (commonly known as “FPI”) are investment
instruments easy to trade and less permanent to stay. This kind of investment do not
represent a controlling stake in an enterprise. FPI comes from many diverse sources i.e.
small company’s pension or through mutual funds. The return on FPI is in the shape of
interest payments of dividends. The FPI are further categorized into short term portfolio
and long term portfolio investment. The good example of FPI is equity instruments
intended in stocks or debt (bonds) of a foreign enterprise. The following chart would be
beneficial in understanding the foreign portfolio investment:-
49 Globalization 101. Note 48. Ibid.
21
FOREIGN PORTFOLIO INVESTMENT
STOCKS DEBTS
Dividend payments Interest incentives
Holder is owner of part of company Bond rights ownership
Acquisition of voting rights No voting rights
Holding period is open ended Specific holding period
“Greenfield investment” is foreign direct investment where a parent company
constructs a new venture from scratch in the third country whereby it installs new
equipped facilities. Through this venture, parent companies also create jobs and
employment in foreign country by hiring new employees. Developing countries
encourage corporations in this type of investment by offering tax incentives, subsidies at
the cost of loss in corporate tax revenues, which is considered as small price if new
employment are created and knowledge and technology are gained to uplift country’s
human capital (The Investopedia, 2015)50. It is setting up of new enterprises for
manufacturing (Srijanee Bhattacharyya et al., 2015)51. On the other hand, Brown field
investment is a kind of investment, where a foreign enterprise or govt. entity purchases or
leases existing productions facilities to launch a new production activity (The
Investopedia, 2015)52. The example of Greenfield investment is that of Honda in UK,
which started all elements from scratch and Tata’s acquisition of Jaguar land Rover
(Financial Times, 2015)53.
Greenfield investment and brownfield investment has their own merits and
demerits. In Greenfield investment, new facility offer maximum design flexibility and
efficiency and the foreign enterprises is in a better position to develop facility as per their
50The Investopedia. (2015, Nov 20). The definition of Greenfield Investment. Retrieved http://www.investopedia.com/terms/g/ green field.asp 51Srijanee Bhattacharyya Slaughter and May. (2015, Nov 20). Legal Regimes Governing Foreign Direct Investment (FDI) In Host Countries. Retrieved http://www.a4id.org/sites/default/files/user/documents/FDI%20Legal%20Guide.pdf 52The Investopedia. (2015, Nov 20). The definition of Brownfield Investment. Retrieved http://www.investopedia.com/terms/g/ greenfield.asp 53Financial Times. (2015, Nov 20). The definition of Greenfield Investment. Retrieved http://lexicon.ft.com/Term?term=foreign-direct-investment
22
own needs. New facilities are much less costly to maintain than used facilities. In setting
up new projects, the Greenfield investing companies are in a better position to attract
employees. On the other hand, in Brownfield facilities, building is already constructed.
The cost of start-up is reduced. The time of construction new facility or building is
avoided. The licenses and approval for running the business is “up to code” and risk of
buyer’s repentance is great (The Investopedia, 2015)54.
Privatization means transfer of ownership, property or business from govt. to
private sector. In this case, govt. previously controlling ceases to have ownership rights
of entity (The Indian Times, 2015)55. Some of the research study shows that there is
direct linkage between FDI and privatization. Privatization directly affects FDI as it
involves private sector participation in state owned corporations (Boubakri. N. et al.,
2015)56. The traces of privatization started some twenty years back, when a large number
of countries of world started economic reform programs to allow role of private sector,
which was called privatization. The purposes of this reform was to reduce govt. control in
the economy and shift resources and ownership to private investors from state. This
inefficiency of state corporations also contributed significantly to large extent for
privatization. Thereafter, international competition and lifting of trade barriers also
strengthen the process of privatization. Internationally, when countries promulgates
policies favorable to private ownership, then they attract the attention of foreign
investors, especially from MNCs, who divert their investment in the shape of FDI, which
normally takes place in developing countries. Some studies point out that upsurge
witnessed in FDI was due to privatization. Many Latin American Countries recorded rise
in foreign investment due to privatization (Boubakri. N. et al., 2015)57. While on the other
hand, proponent of privatization says that surge in privatization was due to investment
climate, lifting of trade barrier and provisions of good institutional environment was sole
contributory to the increase of foreign investment over two decades (Boubakri. N. et al.,
54 The Investopedia. (2015, Nov 20). What is the difference between a greenfield and a brownfield investment? Retrieved http://www. investopedia.com/ask/answers/043015/what-difference-between-green-field-and-brown-field-investment.asp 55 The Indian Times. (2015, Nov 20). Definition of privatization. Retrieved http://economictimes.indiatimes.com/definition/ privatiz ation 56 Boubakri. N, Jean Claude Cosset, Nassima Debab and Pascale Valery. (2015, Nov 23). The Dynamics of Foreign Direct Investment and Privatization: An Empirical Analysis. Retrieved http://www.erudit.org/revue/mi/2009/v13/n/02978/ar.html 57 The Dynamics of Foreign Direct Investment and Privatization: An Empirical Analysis. Ibid. note 56. paragraph 1
23
2015)58. The privatization facilitates the investment climate by making investment more
lucrative for investors, which in result contributes to increased growth and development
process especially in institutional quality of the country i.e. law enforcement and rule of
law (Boubakri. N. et al., 2015)59. As per World Bank’s report, two industries were
prominent in receiving FDI inflows i.e. banking and telecommunication and these
industries were under privatization activities. Alone, in 2006 most of 10 largest
privatization, the mergers and acquisitions were prominently witnessed in banking and
telecommunication industry.
Almost all of third world countries are burdened with public sector debts. After
the financial crises, many developed countries have reduced official’s development
assistance to developing countries and developing countries are left with no other source
but to see for private foreign capital. Due to poor performance of state owned enterprises
(“SOE”), the economic reforms in 1980 and policies to attract FDI has paved the way for
privatization programs. In these programs, the MNCs showed interest and number of
private enterprises worldwide has grown rapidly (Fatta Bahadur, K.C. 1996)60. Foreign
Direct Investment through privatization programs accounted for about 5% of total FDI
inflows into developing countries in 1988-92 (Fatta Bahadur, K.C. 1996)61.
1.7 INTERNATIONAL INVESTMENT AGREEMENTS
These agreements are types of treaties between states over the issues of cross
border investments intended to protect, promote and liberalize such kinds of investment.
Most of International Investment agreements are related to Foreign Direct Investment
(FDI). Under these agreements, the countries resolved to follow designated international
standards on the treatment of foreign investment within its territories. The other
significant factors of these agreements are disputes resolution, if such commitments are
not met by the signatories’ countries. The most practicing common types are bilateral
Investment Treaties (BIT) and Preferential Trade and Investment Agreements. Some of
58 The Dynamics of Foreign Direct Investment and Privatization: An Empirical Analysis. Ibid. note 56. paragraph 2 59 The Dynamics of Foreign Direct Investment and Privatization: An Empirical Analysis. Ibid. note 56.paragraph 6 60 Fatta Bahadur, K.C. (1996). Foreign Direct Investment through Privatization in Developing Countries. Tribhuran University Journal, Vol.XIX, No.2. Retrieved http://www.nepjol.info/index.php/TUJ/article/viewFile 61 Foreign Direct Investment through Privatization in Developing Countries. Ibid note 60. 109
24
“International Taxation Agreements” and “Double Taxation Treaties” (DTTs) are also
considered international investment treaties as taxation is also interlinked with global
investment. “Bilateral Investment Treaties” mainly deals with foreign investment
standards of treatment and its protection. These treaties include investment made by
corporations or nationals of one state into the territories of another signatory state. “The
Preferential Trade Investment Agreements” are treaties among countries on cooperation
in economic and trade areas. In order to classify into category of IIA, PTIAs must include
provisions of foreign investment (The Wikipedia, Free Encyclopedia, 2015)62.
“International Investment Agreements, (IIA)” have a long history. Essentially, the
history of IIA can be divided into three eras. This first era comprises of “18th Century and
continued till the end of Second World War”. The second is the “Post-Colonial Era”
(After end of War till 1990), which also witnessed breakdown of Soviet Union. The third
is global era which starts in 1990 and continues until the present. Prior to the Second
World War, the protection of foreign direct investment was not an issue in international
agreements. Most of such agreements contained clauses for trade relations and provisions
for protection of property of nationals of one country in the territory of another state. The
leading example in this regard is that of US, which in the Eighteen Century started
concluding international investment agreements of “Friendship, Commerce and
Navigation” (FCN), which was intended to strengthen trade relations with its treaty
partner63. These treaties contained provisions guaranteeing “special protection”64 or “full
and perfect protection”65 to the properties of nationals of one party in the territory of
another party. They also provided for clauses relating to payment of compensation for
62 The Wikipedia, Free Encyclopedia. (2015, Dec 11). International investment agreement. Retrieved https://en.wikipedia.org/wi ki/ International _investment_agreement 63 Not all of these treaties were formally titled treaties of “friendship, commerce and navigation.” The name is thus a generic one. The first such agreement was the Treaty of Amity and Commerce, U.S.-Fr., July 16, 1782, 8 Stat. 12, negotiated with France in 1778 by Benjamin Franklin, Arthur Lee and Silas Dean. Other Eighteenth Century agreements include Treaty of Amity and Commerce, U.S.-Neth., Oct. 8, 1782, 8 Stat. 32; Treaty of Amity and Commerce, U.S.-Swed., Apr. 3, 1783, 8 Stat. 60; Treaty of Amity and Commerce, U.S.-F.R.G. (Prussia), July 9- Sept. 10, 1785, 8 Stat. 84; Treaty of Peace and Friendship, U.S.-Morocco, June 23-July 6, 1786, 8 Stat. 100; Treaty of Amity, Commerce and Navigation, U.S.-G.B., Nov. 19, 1794, 8 Stat. 116; and Treaty of Friendship, Limits and Navigation, U.S.-Spain, Oct. 27, 1795, 8 Stat. 138. 64 For example, General Convention of Peace, Amity, Navigation and Commerce, U.S.-Colom., art. Tenth, Oct. 3, 1824, 8 Stat. 306; Treaty of Peace, Friendship, Commerce, and Navigation, U.S.-Bol., art. 13, May 13, 1858, 12 Stat. 1003; General Treaty of Amity, Commerce, and Consular Privilege, U.S.-El Sal., art. 13th, Dec. 6, 1870, 18 Stat.725. 65 For example, Treaty of Friendship, Commerce, and Navigation, U.S.-Para., art. IX, Feb. 4, 1859, 12 Stat. 1091; Treaty of Friendship, Commerce, and Navigation, U.S.-Arg., art. VII, July 27, 1853, 10 Stat. 1005; Treaty of Friendship, Commerce, and Navigation, U.S.-Costa Rica, art. VII, July 10, 1851, 10 Stat. 916.
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expropriation66. These treaties also contain provisions for Most Favored Nation (MFN)
and national treatment for business activity into the territory of other state67.
The customary international law was the primary source for safeguarding foreign
investment in this era, which required host state to give treatment to the investment in
accordance with recognized standard internationally (BROWNLIE. IAN. 1998)68.
However, international law was not satisfactorily protecting foreign investment. First,
some of countries were against the minimum standard of treatment of foreign investment
(BROWNLIE. IAN. 1998)69. Like many Latin American Countries stuck to “Calvo
Doctrine”, whereby the host countries can give similar treatment to foreign investors as
they provided to their own investors (DONALD R. SHEA. 1955)70. Second, even where
it was agreed that foreign investment would be provided certain international minimum
Standards, the contents of standard was vague and not demanding71. Thirdly, the concept
of espousal was introduced, when the host country did not have any agreement providing
dispute resolution through arbitration. Thus, customary norm remained unattended to,
which were used to be resolved through espousal technique72. Espousal is new genre to
international investment law in which state of injured national assumingly own the claim
of national as of its own and contest the claim against the country that has injured the
national (MARJORIE MILLACE WHITEMA, 1967)73, which was found to be
unsatisfactory remedy for the reasons that the national state cannot as a matter of
obligation can espouse a claim(MARJORIE MILLACE WHITEMA, 1967)74. Secondly,
home state seldom espouse the claim as it would cause disruption to their relations of
66 For example, Treaty of Amity, Commerce, and Navigation, U.S.-Congo, art. III, Jan. 24, 1891, 27 Stat. 926; General Treaty of Amity, Commerce, and Consular Privileges, U.S.-El Sal., art. 29th, Dec. 6, 1870, 18 Stat. 725; Treaty of Friendship, Commerce, and Navigation, U.S.- Nicar., art. IX, June 21, 1867, 15 Stat. 549. 67 For example, General Treaty of Amity, Commerce, and Navigation, supra note 8, art.3rd; Treaty of Commerce, U.S.-Yugo., art. I, Oct. 14, 1881, 22 Stat. 963. 68 Brownlie. Ian. (1998). Principles of Public International Law (5th ed.) 527-28 69 Principles of Public International Law (5th ed.) 526-27. 70 Donald R. Shea. (1955). The Calvo Clause: A PROBLEM of Interamerican and International law and Diplomacy. 17-20 71 The classic formulation of the standard was that articulated in the Neer Claim, 4 R. Int’l Arb. Awards 60 (1926), in which the commission required that the treatment “amount to an outrage, to bad faith, to willful neglect of duty, or to an insufficiency of governmental action so far short of international standards, that every reasonable and impartial man would readily recognize its insufficiency.” The international minimum standard, however, was also said to include some more rigorous requirements, including an obligation to pay "prompt, adequate and effective" compensation for the expropriation of foreign owned property. See infra text accompanying note 96." 72 A state is not subject to the jurisdiction of an international tribunal without its consent. Reparation for Injuries Suffered in the Service of the United Nations, Advisory Opinion, 1949 I.C.J. 174, 177-78 (April 11). 73 Marjorie Millace Whiteman. (1967). Digest of International Law. 1216-19 74 Digest of International LAW.
26
home states with host state (KENNETH J. VANDEVELDE. 1992)75. A source country
may also resort to espousal technique to establish the claim of its national, once he has
exhausted all remedy under the law of host state76. Since, espousal is diplomatic and
intended to resolve investment dispute, therefore, the host state may or may not be
agreeable to resolve the claim of any terms. Due to diplomatic expertise, US alone was
able to bring along Latin American countries in 19th Century to accept periodically the
claims of injured nationals through arbitration77. Further, in place of diplomacy,
sometimes, states apply armed force to shelter the investments78. For example, the
“Roosevelt Corollary to the Monroe Doctrine” used American troops to collect debts of
American in Western Hemisphere. During first third of 20th century, US on a number of
occasion intervened in Latin America, until such practice was ended by Roosevelt
Administration. To sum up, international investment mechanism in colonial era was
having diverse characteristics like, in one and same agreement, trade and property
protection clauses were mentioned. In this era, there was no practice by the states to
negotiate separate agreement for commerce and property. The only purpose of treaties
was to establish bilateral commercial association, whereas protection to property was
under the commercial relations (SAMUEL BEMIS., 1965)79. The enforcement
mechanism for treaties was weak and limited in scope. Infact, treaties generally did not
provide for enforcement mechanism (Jeswald W. Salacuse & Nicholas P. Sullivan, 2005) 80. In a result, other means like military force was deployed to protect the foreign
investment.
The second phase of international investment agreement starts with the advent of
era after Second World War and remained till disruption of Soviet Union. There are three
significance events that transformed the contents of IIA. First was liberating of trade by
75 Kenneth J. Vandevelde. (1992). United States Investment Treaties: Policy and Practice. 10, 23 76 For example. Interhandel (Switz. v. U.S.), 1959 I.CJ. 6, 27 (Mar. 21); Ambatielos Claim (Greece v. U.K.) 23 I.L.R. 306, 344 (1956); 8 Whiteman, supra note 18, at 769- 807. 77 One estimate is that between 1829 and 1910, the United States entered into approximately 40 arbitrations with Latin American countries. See Lionel M. Summers, Arbitration and Latin America, 3 CAL. W. INT’L L.J. 1, 7 (1972). 78 For example. Edwin M. Borchard, Limitations on Coercive Protection, 21 AM. J. INT’LL. 303 (1927); Luis M. Drago, State Loans in Their Relation to International Policy, 1 AM. J. INT’L L. 692 (1907). 79 Samuel Bemis. (1965). A Diplomatic History of the United States. 25-29, 65-84, 101-10, 200-02 (describing early history of FCN agreements, including their purpose). 80 International investment law as late as the period immediately following the Second World War has been characterized as “an ephemeral structure consisting largely of scattered treaty provisions, a few questionable customs, and contested general principles of law.” Jeswald W. Salacuse & Nicholas P. Sullivan. (2005). Do BITs Really Work? An Evaluation of Bilateral Investment Treaties and Their Grand Bargain, 46 HARV. INT’L L.J. 67, 68.
27
victorious allies who formed consensus in this regard (RONDO CAMERON, 1997)81.
That consensus in a result concluded the “General Agreement on Tariffs and Trade,
GATT” in 199782. In a result, the entire legal framework of international trade from
bilateral to multilateral agreements was changed and forced worldwide trade
liberalization83. In wake of GATT, many multilateral organization came into existence
for trade, but not for investment. Infact, GATT took over entire international trade
negotiations, which diminished bilateral trade agreements US brought a new genre of
“FCN agreements” in 1946, which continued for next 20 years with conclusion of 21
agreements (HENRY C. HAWKINS, 1951) 84. These FCN contains provisions relating to
protection provisions that resembles the provisions in FCNs of the Colonial Era. The
FCNs in wake of Second World War guaranteed “equitable treatment”85 and the “most
constant protection and security”86 to the interests of foreign nationals and ensure speedy
compensation87. The foreign investor were made entitled as a national and MFN status
with respect to the right to establish investment was also conferred in post-War FCNs88.
81 Rondo Cameron. (1997). A Concise Economic History of the World. 370-71 82 General Agreement on Tariffs and Trade, Oct. 20, 1947, 61 Stat. A-11, 55 U.N.T.S. 188. 83 The most recent to conclude was the Uruguay Round, which ended in December 1993. See John Croome, Reshaping The World Rading System (1995). The World Trade Organization is now engaged in the Doha Round of multilateral trade negotiations. 84 For a discussion of the modern FCNs, see Henry C. Hawkins, Commercial Treaties and Agreements: Principles and Practice (1951); Robert Reubert Wilson, The International Law Standards in Treaties of the United States (1953); Robert Reubert Wilson, United States Commercial Treaties and International Law (1960); Herman Walker, Jr., Modern Treaties of Friendship, Commerce and Navigation, 42 MINN. L. REV. 805 (1958); Herman Walker, Jr., Treaties for the Encouragement and Protection of Foreign Investment: Present United States Practice, 5 AM. J. COMP. L. 229 (1956); Robert R. Wilson, A Decade of New Commercial Treaties, 50 AM. J. INT’L L. 927 (1956); Robert R. Wilson, Postwar Commercial Treaties of the United States, 43 AM. J. INT’L L. 262 (1949); and Robert R. Wilson, Property-Protection Provisions in United States Commercial Treaties, 45 AM. J.INT’L L. 83 (1951). 85 For example, the FCN with Greece provided that: “Each Party shall at all times accord equitable treatment to the persons, property, enterprises and other interests of nationals and companies of the other Party.” Treaty of Friendship, Commerce and Navigation, U.S.-Greece, art. I, Aug. 3, 1951, 5 U.S.T. 1829 [hereinafter FCN Greece]. 86 For example, FCN Greece, supra note 36, at art. VII(1), provided that: “Property of nationals and companies of either Party shall receive the most constant protection and security within the territories of the other Party.” 87 For example, FCN Greece provided that: Property of nationals and companies of either Party shall not be taken within the territories of the other Party except for public benefit, nor shall it be taken without the prompt payment of just compensation. Such compensation shall be in an effectively realizable form and shall represent the full equivalent of the property taken; and adequate provision shall have been made at or prior to the time of taking for the determination and payment thereof. It is understood that withdrawal of such compensation shall be in accordance with applicable laws and regulations consistent with the provisions of Article XV [relating to exchange controls] of the present Treaty. The provisions of the present paragraph shall extend to interests held directly or indirectly by nationals and companies of either Party in property which is taken within the territories of the other Party. FCN Greece, supra note 89, at art. VII(3) 88 For example, the Treaty of Friendship, Commerce and Navigation with Japan provided that: 1. Nationals and companies of either Party shall be accorded national treatment with respect to engaging in all types of commercial, industrial, financial and other business activities within the territories of the other Party, whether directly or by agent or through the medium of any form of lawful juridical entity. Accordingly, such nationals and companies shall be permitted within such territories: (a) to establish and maintain branches, agencies, offices, factories and other establishments appropriate to the conduct of their business; (b) to organize companies under the general company laws of such other Party, and to acquire majority interests in companies of such other Party; and (c) to control and manage enterprises which they have established or acquired. Moreover, enterprises which they control, whether in the form of individual proprietorships, companies or otherwise, shall, in all that relates to the conduct of the activities thereof, be accorded treatment no less favorable than that accorded like enterprises controlled by nationals and companies of such other Party. 2. Each Party reserves the right to limit the extent to which aliens may within its territories establish, acquire interests in, or carry on public utilities enterprises or enterprises engaged in shipbuilding, air or water transport, banking involving depository or fiduciary
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These post-war FCNs were also innovative as they extend the benefits of agreements
especially protection to corporate entities (Herman Walker, Jr., 1956)89. Whereas, the
earlier FCNs had protected individuals. First time, these FCN included protection against
exchange controls90. Moreover, these agreements directly emphasized dispute resolution
through international Court of Justice for resolution of disputes by interpreting or
applying the clauses of the agreement91. This dispute resolution clause solved the major
problems that a host state could not be forced to submit to jurisdiction of an international
tribunal without its consent92. These post-war FCNs showed that investment protection
has become a primary goal of these agreement (VANDEVELDE., 1992)93. The second
important event that shaped foreign investment system of the Post-Colonial Era was
decolonization, which created a number of newly independent yet undeveloped countries
functions, or the exploitation of land or other natural resources. However, new limitations imposed by either Party upon the extent to which aliens are accorded national treatment, with respect to carrying on such activities within its territories, shall not be applied as against enterprises which are engaged in such activities therein at the time such new limitations are adopted and which are owned or controlled by nationals and companies of the other Party. Moreover, neither Party shall deny to transportation, communications and banking companies of the other Party the right to maintain branches and agencies to perform functions necessary for essentially international operations in which they are permitted to engage. 3. The provisions of paragraph 1 of the present Article shall not prevent either Party from prescribing special formalities in connection with the establishment of alien-controlled enterprises within its territories; but such formalities may not impair the substance of the rights set forth in said paragraph. 4. Nationals and companies of either Party, as well as enterprises controlled by such nationals and companies, shall in any event be accorded most-favored-nation treatment with reference to the matters treated in the present Article. Treaty of Friendship, Commerce and Navigation, U.S.-Japan, art. VII, Apr. 2, 1953, 4 U.S.T. 2063 [hereinafter FCN Japan]. 89 Herman Walker, Jr. (1956). Provisions on Companies in United States Commercial Treaties, 50 AM. J. INT’L L. 373 90 For example, FCN Japan, at art. XII, provided that: 1. Nationals and companies of either Party shall be accorded by the other Party national treatment and most-favored-nation treatment with respect to payments, remittances and transfers of funds or financial instruments between the territories of the two Parties as well as between the territories of such other Party and of any third country. 2. Neither Party shall impose exchange restrictions as defined in paragraph 5 of the present Article except to the extent necessary to prevent its monetary reserves from falling to a very low level or to effect a moderate increase in very low monetary reserves. It is understood that the provisions of the present Article do not alter the obligations either Party may have to the International Monetary Fund or preclude imposition of particular restrictions whenever the Fund specifically authorizes or requests a Party to impose such particular restrictions. If either Party imposes exchange restrictions in accordance with paragraph 2 above, it shall, after making whatever provision may be necessary to assure the availability of foreign exchange for goods and services essential to the health and welfare of its people, make reasonable provision for the withdrawal, in foreign exchange in the currency of the other Party, of: (a) the compensation referred to in Article VI, paragraph 3, of the present Treaty [relating to expropriation], (b) earnings, whether in the form of salaries, interest, dividends, commissions, royalties, payments for technical services, or otherwise, and (c) amounts for amortization of loans, depreciation of direct investments, and capital transfers, giving consideration to special needs for other transactions. If more than one rate of exchange is in force, the rate applicable to such withdrawals shall be a rate which is specifically approved by the International Monetary Fund for such transactions or, in the absence of a rate so approved, an effective rate which, inclusive of any taxes or surcharges on exchange transfers, is just and reasonable. 4. Exchange restrictions shall not be imposed by either Party in a manner unnecessarily detrimental or arbitrarily discriminatory to the claims, investments, transport, trade, and other interests of the nationals and companies of the other Party, nor to the competitive position thereof. 5. The term “exchange restrictions” as used in the present Article includes all restrictions, regulations, charges, taxes, or other requirements imposed by either Party which burden or interfere with payments, remittances, or transfers of funds or of financial instruments between the territories of the two Parties. 91 For example, FCN Japan, supra note 39, at art. XXIV(2), provided that: “Any dispute between the Parties as to the interpretation or application of the present Treaty, not satisfactorily adjusted by diplomacy, shall be submitted to the International Court of Justice, unless the Parties agree to settlement by some other pacific means.” 92 A state is not subject to the jurisdiction of an international tribunal without its consent. Reparation for Injuries Suffered in the Service of the United Nations, Advisory Opinion, 1949 I.C.J. 174, 177-78 (April 11). 93 Vandevelde. (1992), supra note 75. 17.
29
(DAVID S. LANDES, 1998)94. These infant countries were full of patriotism and used to
protect independence (M. SORNARAJAH, 1994)95 and regarded the investment as a
form of neocolonialism because it controlled over the means of production (DEAN
HANINK. 1994)96. Foreign investment was viewed as interference in the domestic affairs
of the host state (ROBERT GILPIN WITH ASSISTANCE OF JEAN M. GILPIN,
1994)97. The trade relationship between developed and developing counties were on
decline for the reasons that foreign investment was viewed with suspicion. The fear was
that developed countries would exploit the developing countries in the name of trade and
foreign investment (BARRY W. POULSON, 1994)98. Due to this, many developing
countries did not allow these developed countries to reap the benefits from their soil in
the name of foreign investment and started expropriation of existing investment (Jeswald
W. Salacuse & Nicholas P. Sullivan, 2005)99. The developing countries concentrating on
the import policies, which would depend on local goods and services rather than
importing advanced countries (JOHN RAPLEY. 1996) 100. The economic relations with
other developing countries by developing countries were emphasized instead of
establishing relations with developed countries (DOMINICK SALVATORE, 1995)101.
The third event in this era marked with emergence of socialist bloc of Soviet
Union. After war, the socialist’s states expropriated massive private sector including
foreign held assets MICHAEL (BARRETT BROWN. 1995)102. These socialists’ states
encouraged the developing countries to discontinue trade relations with developed
countries, as the latter exploit them under the garb of trade relations. They further
suggested alternative route of economic development was to regulate the economy
94 The number of countries more than tripled as a result of decolonialization after the war. David S. Landes, (1998), The Wealth and Poverty of Nations 431 (W.W. Norton & Co. Ltd. 1999). 95 M. Sornarajah. (1994) The International Law on Foreign Investment 12. 96 Dean Hanink. (1994). The International Economy: A Geographic Perspective 234. 97 Robert Gilpin with Assistance of Jean M. GILPIN. (1994). The Political Economy of International Relations 247-48 (1987); Michael P. Todaro, Economic Development 534. 98 Barry W. Poulson. (1994). Economic Development: Private and Public Choice 39. 99 These expropriations included notably the seizure of petroleum assets in Iran in 1951 and in Libya in 1955, and Castro’s expropriation of the private sector in Cuba starting in 1959. These waves of expropriations continued in the 1970s. One study by the United Nations has identified 875 expropriations occurring in sixty-two countries between 1960 and 1974. ” Jeswald W. Salacuse & Nicholas P. Sullivan. (2005). Do BITs Really Work? An Evaluation of Bilateral Investment Treaties and Their Grand Bargain, 46 Harv. INT’L L.J. 67, 68 100 John Rapley. (1996). Understanding Development: Theory and Practice in the Third World 22-25. 101 Starting in the 1960s, developing countries made numerous attempts to create preferential trading arrangements among themselves, most of which were unsuccessful. Dominick Salvatore. (1995). International Economics 314-15, 323-25. 102 Michael Barrett BROWN. (1995). Models in Political Economy 193-267 (Penguin Books 2d ed.); RAPLEY. at 44.
30
instead development through free market (E. WAYNE NAFZIGER. 1997)103. By the
early 1970s, these countries formed the alliance by mounting efforts at UN General
Assembly, where they used their majority to establish their right of expropriation of
investment without compensation equivalent to fair market value of the property. Finally
on May 1, 1974, United Nations General Assembly adopted the “Declaration of
International Economic Order, (NIEO)”104. According to which the states have “full
permanent sovereignty” over their natural resources and other economic activities. This
also include “the right of initialization of transfer of ownership to its nationals”105. On
12-12-1974, the General Assembly with a majority vote106 adopted the “Charter of
Economic Rights and Duties of States, (CERDS)”107, in which the states was conferred
the exclusive right “to initialize, expropriate or transfer ownership of foreign property, in
which case appropriate compensation should be paid by the state adopting such measures,
taking into account its relevant laws and regulations and all circumstances that the state
considers pertinent108. The charter further stated that compensation for expropriated
investment would be on the basis of international law instead of national law (Charles N.
Brower & John B. Tepe, Jr. 1975) & (Burns H. Weston., 1981)109.
The uncompensated expropriation was responded by developed countries through
creating bilateral investment treaty (BIT) (RUDOLF DOLZER & MARGRETE
STEVENS , 1995)110. The UN at the end of war, held the case of military as illegal111,
103 E. Wayne Nafziger. (1997). The Economics of Developing Countries 106-08 (3d ed.); RAPLEY. at 18-20. 104 Declaration on the Establishment of a New Economic Order, G.A. Res. 3201(SVI), U.N. GAOR, 6th Special Sess., 2229th plen. mtg., U.N. DOC. A/RES/3201(S-VI) (May 1, 1974), reprinted in 13 I.L.M. 715 (1974). 105 Id. 106 The six states that voted in opposition were Belgium, Denmark, the Federal Republic of Germany, Luxembourg, the United Kingdom and the United States. The ten states that abstained were Austria, Canada, France, Ireland, Israel, Italy, Japan, the Netherlands, Norway, and Spain. Charter of Economic Rights and Duties of States, G.A. Res. 3281 (XXIX), U.N. GAOR, 29th Sess., 2315th plen. mtg., U.N. Doc. A/RES/3281(XXIX) (Dec. 12, 1974), reprinted in 14 I.L.M. 251 (1975). 107 Charter of Economic Rights and Duties of States, G.A. Res. 3281 (XXIX), U.N. GAOR, 29th Sess., 2315th plen. mtg., U.N. Doc. A/RES/3281(XXIX) (Dec. 12, 1974), reprinted in 14 I.L.M. 251 (1975). 108 The sixteen states that voted in opposition were Austria, Belgium, Canada, Denmark, Federal Republic of Germany, France, Ireland, Italy, Luxembourg, Japan, the Netherlands, Norway, Spain, Sweden, the United Kingdom and the United States. The six states that abstained were Australia, Barbados, Finland, Israel, New Zealand and Portugal. 109 Charles N. Brower & John B. Tepe, Jr. (1975). The Charter of Economic Rights and Duties of States: A Reflection or a Rejection of International Law?, 9 INT’L LAW. 295 (1975); Burns H. Weston. (1981). The Charter of Economic Rights and Duties of States and the Deprivation of Foreign Owned Wealth, 75 AM. J. INT’L L. 437. 110 The BIT programs as they emerged in the early years are described in Rudolf Dolzer & Margrete Stevens, Bilateral Investment Treaties (1995); Adeoye Akinsanya. (1987). International Protection of Direct Foreign Investments in the Third World, 36 INT’L & Comp. L.Q. 58 Eileen Denza & Shelagh Brooks, Investment Protection Treaties: United Kingdom Experience, 36 INT’L & Comp. L.Q. 908 (1987); Pamela B. Gann, The U.S. Bilateral Investment Treaty Program, 21 STAN. J. INT’L L. 373 (1985); Mohamed I. Khalil, Treatment of Foreign Investment in Bilateral Investment Treaties, 7 ICSID REV. 339 (1992); Palitha T.B. Kohona, Investment Protection Agreements: An Australian Perspective, 21 J. World Trade L. 79 (1987); T. Modibo Ocran, Bilateral Investment Protection Treaties: A Comparative Study, 8 N.Y.L. SCH. J. INT’L & COMP. L. 401 (1987); Robert K. Paterson, Canadian Investment Promotion and Protection Treaties, 29 CAN. Y.B. INT’L L. 373 (1991); Jeswald W. Salacuse, BIT by BIT: The Growth of Bilateral Investment Treaties and Their Impact on
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except in self-defense112. Thus, any developed countries cannot recover debts or provide
protection to investment by use of force or aggression under international law (GREEN
HACKWORTH, 1943)113. As compared to customary international law, these treaties
proved to be most effective means for monetary benefits for expropriated investment.
Having been torn down, the Germany after World War II, was the first to sign BIT with
Pakistan and Dominic Republic in 1959 as it was sensitive to political risk and their
investment was exposed (UNCTAD, 1998)114. Followed by Germany, other Western
European Countries also started concluding BITs, these are France’s first BIT was in
1960115. Switzerland116 in 1961, the Netherlands117 in 1963, Italy and Belgium-
Luxembourg union118 in 1964, Sweden119 and Denmark120 in 1965, and Norway in121
1966. Thereafter, 1970s, saw surge in “expropriation given the adoption of NIEC and
CERDs made other states to sign BIT. These second group of countries are UK in 1975
(UNCTAD, 1998)122, Austria in 1976123 and Japan in 1977124. These new kinds of
treaties were first of its kinds and contained some of the unique features as they were
exclusively related to investment. They were uniform in content. The underlying point
was that the agreement would protect the foreign investment of developed countries and
handed over to developing countries for signature with final agreement reflecting only
minor changes from the original draft. Although, both parties seemed to formally assume
some obligations but in practice, all the obligations were fell on developing countries.
Foreign Investment in Developing Countries, 24 INT’L LAW. 655 (1990); M. Sornarajah, State Responsibility and Bilateral Investment Treaties, 20 J. World. Trade L. 79 (1986); Kenneth J. Vandevelde, The Bilateral Investment Treaty Program of the United States, 21 Cornell INT’L L.J. 201 (1988) [hereinafter Vandevelde, The Bilateral Investment Treaty Program]; and Kenneth J. Vandevelde, U. S. Bilateral Investment Treaties: The Second Wave, 14 Mich. J. INT’L L. 621 (1993). 111 U.N. Charter art. 2, para. 4 (Providing in part that “[a]ll members shall refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state ….”). 112 U.N. Charter art. 51 (Declaring that “[nothing in the present charter shall impair the inherent right of individual or collective self-defense if an armed attack occurs against a Member of the United Nations until the Security Council has taken the measures necessary to maintain international peace and security.”). 113 Even before the adoption of the U.N. Charter, the use of force to collect debts had become increasingly controversial. For example, Article I of the Hague Convention of 1907 had outlawed the use of force to collect contract debts owed to private citizens of one state by the government of another state unless the debtor state refused to submit the dispute to arbitration. Pacific Settlement of International Disputes (Hague, I), Oct. 18, 1907, T.S. No. 536, 1 Bevans 577. The American delegation to the conference that drafted the convention had supported this provision. GREEN HACKWORTH. (1943). Digest of International Law 152. 114 United Nations Conference on Trade and Development, Bilateral Investment Treaties in the MID-1990S at 8, 177, U.N. Sales No. E.98.II.D.8 (1998). 115 Id. at 175 (agreement was with Chad). 116 Id. at 205 (agreement was with Tunisia). 117 Id. at 192 (agreement was with Tunisia). 118 Id. at 163 (agreement was with Tunisia). 119 Id. at 204 (agreement was with Ivory Coast). 120 Id. at 172 (agreement was with Madagascar). 121 Id. at 193 (agreement was with Madagascar). 122 UNCTAD, supra note 114, at 211 (agreement was with Egypt). 123 Id. at 161 (agreement was with Romania). 124 Id. at 185 (agreement was with Egypt).
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Due to new treaty regime, more and more developing countries started concluding
BITs, as they were of believe that offering legal protection, the investors would be at ease
to invest in these countries125. On the other hand, developed countries were also
concerned about protection of their investment, which FCN did not provide, but the latest
treaty mechanism is a fast reaction to past expropriation of existing investments. Despite
above factual position, the signing of BITs, were somewhat limited. From 1959-1969,
only, seventy five BITs were signed126. From 1970 to 1979, 92 BITs were executed.
1980s, 219 BITs were signed that ranges one treaty per month from 1959 to 1989127. The
provisions of BITs were also similar to the provisions of FCNs concluded by the United
States including a guarantee of national and most favored nation treatment and
protections for covered investment128. Nonetheless, these similarities also comprised of
speedy payment of expropriation and restrictions on exchange controls. BIT also
contained more effective and dynamic provision for referral of investment dispute to
arbitration like modern FCNs did, the only difference between two of them were in case
of FCNs, it adopts disputes resolution through International Court of Justice, whereas
BIT refers investment dispute to an ad hoc arbitral tribunal129. Some of BITs of 1960
contained a provision in which host state consented to arbitration of certain dispute with
investors, which prompted the adoption of 1965 Convention for setting up of
International center for settlement of Investment Dispute130. This forum was unique in its
kind, as it gave better leverage to developed countries, and their investors to enforce
125 UNCTAD, supra note 114, at 5. 126 UNCTAD, supra note 114, at 9. 127 For a list of BITs concluded from the inception of the program through 1989, see id. at 159-217. 128 For example, the BIT between the United States and Trinidad and Tobago provides: “Each Party shall at all times accord to covered investments fair and equitable treatment and full protection and security, and shall in no case accord treatment less favorable than that required by international law.” Treaty Concerning the Encouragement and Reciprocal Protection of Investment, U.S.-Trin. & Tobago, art. II(3)(a), Sept. 26, 1994, S. TREATY DOC. NO. 104-14 (1995). 129 The BIT between the United States and Ecuador, for example, provides at art.VII: 1. Any dispute between the Parties concerning the interpretation or application of the Treaty which is not resolved through consultations or other diplomatic channels, shall be submitted, upon the request of either Party, to an arbitral tribunal for binding decision in accordance with the applicable rules of international law. In the absence of an agreement by the Parties to the contrary, the arbitration rules of the United Nations Commission on International Trade Law (Uncitral), except to the extent modified by the Parties or by the arbitrators, shall govern. 2. Within two months of receipt of a request, each Party shall appoint an arbitrator. The two arbitrators shall select a third arbitrator as Chairman, who is a national of a third State. The Uncitral Rules for appointing members of three member panels shall apply mutatis mutandis to the appointment of the arbitral panel except that the appointing authority referenced in those rules shall be the Secretary General of the [International Centre for the Settlement of Investment Disputes]. 3. Unless otherwise agreed, all submissions shall be made and all hearings shall be completed within six months of the date of selection of the third arbitrator, and the Tribunal shall render its decisions within two months of the date of the final submissions or the date of the closing of the hearings, whichever is later. Treaty Concerning the Encouragement and Reciprocal Protection of Investment, U.S.- Ecuador, art. VII, Aug. 27, 1993, S. Treaty DOC. NO. 103-15 (1993). 130 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, March 18, 1965, 17 U.S.T. 1270, T.I.A.S. No. 6090.
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claims against their injured investment, which did not involve military force or
aggression. These treaties did not also require the investor to first exhaust local remedies
before approaching to international arbitration. Due to these provisions, BITs were
viewed as politicization of investment disputes and new investment protection in the
realm of law (Vandevelde., 1992)131.
The third phase of international investment agreement is called Global Era, which
begins at the end of 1980s. This era witnessed a considerable changes in international
investment agreements (Vandevelde, 1998)132. After conclusions of GATT and GATS,
the WTO became the first forum to exercise jurisdiction over all global investment
including service sector (UNCTAD, 2004)133. The global era also witnessed two major
changes which were responsible for ever increased BITs. The first was market ideology
and second was a loss of alternatives to foreign investment as source of Capital. In this
era, the policies of hostility to foreign investments, import substitutions and closed
markets to foreign goods were considered a mistake (Jeswald W. Salacuse, 1999)134.
“New International Economic Order” and the right of expropriation without
compensation withered away (Thomas Waelde. 1998)135. Latin American countries did
not pursue the Calvo Doctrine any further and adopted international minimum standards
for protection of foreign investors136. The BITs concluded in this era, were not much
changed in content from BITs of the Post-colonial Era.
The compensation clauses for losses of investors due to expropriation, war and
strife were also an important ingredients of these agreement. Most International
Investment Agreement further regulate the cross border transfer of funds relating to
foreign investments. Unlike investments protection, clauses on investment promotion are
rarely found place in International Investment Agreements. The benefits offered by
131 Vandevelde. (1992), supra note 75. 22-25 132 For a more extended discussion of these changes, see Kenneth J. Vandevelde, (1998). Sustainable Liberalism and the International Investment Regime, 19 MICH. J. INT’L L. 373. 133 United Nations Conference on Trade and Development [UNCTAD], World Investment Report 2004: The Shift Towards Services at 302, U.N. Sales No. E.04.II.D.33 (2004), available at http://www.unctad.org/en/docs/wir2004_en.pdf. 134 Jeswald W. Salacuse. (1999). From Developing Countries to Emerging Markets: A Changing Role for Law in the Third World, 33 INT’L Law. 875, 882-86. 135 Thomas Waelde, (1998). Requiem for the “New International Economic Order,” in Festschrif Fuer Ignaz Seidl-Hohenveldern 771 (Gerhard Hafner et al. eds.). 136 They did so by the conclusion of BITs, in which they agreed to certain standards for the treatment of foreign investment and to the submission of disputes with investors involving the BITs to binding arbitration. For example, Bolivia and Uruguay concluded BITs in 1987, Argentina and Venezuela in 1990, and Chile and Peru in 1991.
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foreign investment are vital for developing countries as these countries are in much need
to use this valuable foreign investment and International Investment Agreements play an
important role to raise their economic development. Another core importance of BITs
and PTIA are provisions on investor-state disputes settlement. Through this clause,
foreign investor can resort an international arbitral tribunal in case of dispute with host
state. Some of famous arbitral forums are as under:-
1) “International Center for Settlement of Investment Disputes (ICSID)”
2) “The UN Commission on International Trade Law(UNCITRAL)”
3) “International Chamber of Commerce (ICC) “
The term “investment” has been defined in many cases by the ICSID, like it is a
control and management of bauxite mining facilities137, promissory notes issued by
Venezuela138, a joint venture agreement to develop farmland139 and a franchise
agreement to carry out exploration activity for oil and gas140, in which tribunal held
minor shareholding in a company as an investment141, which fulfills the requirement of
“investment”142.
1.8 BILATERAL INVESTMENT TREATIES
As per UNCTAD, BIT is defined to be “agreement between two countries for
reciprocal encouragement, promotion and protection of investment in each other’s
territories by companies based in either country” (UNCTAD, 2015)143. The basic
structure of BIT remained the same over the years, covering areas of public policy
(health, safety, essential security or environment protection) have more frequently been
incorporated into BITs. A BIT starts with preamble that gives details and information
about agreement and provisions on its scope of application. The relevant terminology like
“investment” and “investor” are also used. Thereafter, the admission of foreign
137 Kaiser Bauxite Co. v. Jamaica, ICSID Case No.ARB/74/3 138 FedaxNV v. Venezeula, ICSID Case No.ARB/96/3 139 Tradex Hellas S.A v. Albania, ICSID Case No.ARB/94/2 140 Deutsche Schachtbau-und Tifebohrgesellschaft mbh (FR Germ) v. State of R’as Al-Khaimah (UAE) ICC Case No.3572 of 1982. 141 MS v Argentine Republic (ICSID Case No.ARB/01/8) 142 Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, ICSID Case No.ARB/03/25 143 United Nation Commission for Trade and Development. (2015, Dec 11). What are BITs?. Retrieved from unctad.org/en/pages/ Home.aspx
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investment and its establishment is provided in BIT. Protection clauses such as
“Standards of Treatment” is also taken care of in BIT. These includes “Minimum
Standards of treatment”, “fair and equitable treatment”, “full protection and security”,
‘national treatment and most favored nation treatment”. BITs also include exchange of
investment proceeds to and fro home country and host country. The expropriation option
is also given in BITs as to in which circumstances, the expropriation would take place
and how the parties would go by it. Likewise, quantum of compensation is also defined in
BIT. The provisions related to war and civil unrest and their protection are also dilated
into modern practice of BITs. The provisions like “investor-state dispute settlement”
mentions the Intentional Arbitral Tribunals (e.g. ICSID, UNCITRAL and ICC) incase of
investment disputes. Sometimes, BITs also included a clause on “State-State Dispute
Settlement”. BITs usually have time limitation of the treaty as to how the agreement is
terminated or extended further specifying to what extent investment conducted prior to
conclusion and satisfaction of the treaty (UNCTAD, 2007)144. The substantive part of any
bilateral investment treaties are more or less the same only worlds are changed and it is
always recommended that reference be made to words as they are used in any investment
treaty145.
Another important provision in BIT is “Fair and Equitable Treatment”, which
means that the states must have a consistent legal framework and all the decisions must
be made consistently and transparently, as per legitimate requirement of the investors146.
Sometimes, in BIT, the investment of foreign investor is given favorable treatment as is
given to nationals of host states and this doctrine is called “National treatment Standard”.
This provision of treaty is an important protection to discourage discriminatory law
making against the investors i.e. Special Taxes or licensing requirement, levied only on
foreign investors. For example, in the case title as Marvin Feldman V. Mexico147, a US
citizen, filed a case for non-payment of tax refunds to CEMSA against Mexico as the
Mexican authorities were denying tax refunds even to Mexican exporters on the basis of
judgments of their Supreme Court). The Tribunal held the non-payment of refund as
144 United Nation Commission for Trade and Development. (2007). Trends in Investment Rulemaking. New York and Geneva. 145 Article 31(1), Vienna Convention on the law of Treaties, which says that the terms of any treaty shall be construed in accordance with their ordinary meaning. 146 Tecnicas Medioambientales Tecmed S.A. v. The united Mexican States, Case No.ARB (AF)/00/2, Award 29, May, 2003 147 Case No.ARB(AF)99/1
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illegal and is in violation of national treatment standard under NAFTA. Repatriation of
investment proceeds to origin country is also important issue, which are normally
allowed by host states as a treaty obligation. This is standard Model clause whereby
permission to transfer funds related to investment is allowed without any restriction in a
hassle free manner from host country.
Thereafter, “Most Favored National Standard Treatment” clause is also found in
BIT, where the host country treats the foreign investment equals to the investments from
any other third state. For example, if the Chinese investors are given an exemption from a
tax, then British investors would also be equally entitled to request for the same treatment
under China-British BIT. In “Bayindir Insaat Turizm Ticaret Ve SanayiAs v. Islamic
Republic of Pakistan”148, a Turkish investor successfully relied upon this clause in
Pakistan-Turkey BIT to benefit from the treatment of “fair and equitable treatment”
provision in the Pakistan-Switzerland BIT. The MFN can be used by the investor to get a
procedure benefit. Like in Australia and China, there is no direct right to arbitration
except the issue of determining compensation amount payable by expropriation exists.
China’s latest BIT, however, contains clauses giving right to foreign investor for
arbitration. For example, the treaties of China with Germany and the Netherlands allows
the investor seek recourse to arbitration in case of investment arbitration. This can be at
best argument for Australian investor in support of MFN in his favor.
In the case of “Maffezini v. Spain”149, the tribunal concluded that if any BIT
contains dispute resolution clause suitably covers the interest of investors, the same could
be relied upon by the investors of “Argentina-Spain Treaty”. This decision was
subsequently followed by the tribunals in “Gas Natural SDG v Argentina”150 and
“Siemens AG v Argentina Republic”151. However, the tribunal in the case of “Tza Yap
Shum v. Republic of Peru”152 interpreted MFN clause in restricted way, holding that
procedural rights do not come under the protection.
148 ICSID Case No.ARB/03/29 149 ICSID Case No.ARB/97/7 150 ICSID Case No.ARB/02/8 151 ICSID Case No.ARB/02/8 152 ICSID Case No.ARB/07/6
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1.9 PROTECTION AGAINST EXPROPRIATION
Investment treaties usually contain clause whereby the right of states to
expropriate foreign investment are not allowed except on the legal, non-discriminatory
basis, for a public purpose ground and with adequate compensation. The definition of
expropriation is wide. It comprise either direct and/or indirect nationalization or measures
having effects of equivalence to nationalization. There are a number of measures, which
can be enforced by the State to potentially deprive an investor from investment, For
example, banning of gambling by any states. There are many other examples of state
legislation, which destroy substantial or whole investment.
In the indirect expropriation, the conduct of state is to be seen as to whether the
same amounts to “nationalization or expropriation” or are equivalent to “nationalization
or expropriation”. In terms of BIT, “nationalize” is defined to be an act of govt., whereby
investment is brought directly or indirectly under the control of host state or host govt.
acquires the investor’s property. Thus, an act on the part of state to “nationalize” the
investment would come under the definition. In almost all standard model of BIT
followed internationally, this expropriation clause with the words “nationalized,
expropriate or subject to measures having effect equivalent to nationalization or
expropriation” are there. It is necessary to see whether expropriation has taken place or
note, the conduct of state with regard to investment property must be borne in mind. He
laid emphasis on “acquisition” in the conduct of state or its agency. If the conduct does
not include acquisition, then it is not expropriation. As per the theory of Mr.Andrew, it
would significantly restrict the interpretation of the provisions in relation to expropriation
found in BITs. In order to make investors entitled for compensation, the standard
definition of the expropriation has to be satisfied. So far as the measures require
compensation is concerned, there are two schools of thoughts. The first says that the
affect of the measures on the investment has to be seen for indirect expropriation and this
is called “sole effects” doctrine. Such doctrine in a way is considered significant
protection to investors, because it does not limit states’ obligation to compensate for
indirect expropriation. However, the second school of though is known as “police
powers” doctrine. In this doctrine, many tribunals interpreted the protection in the way
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that the states would not be subject to claims for compensation, if the expropriation is for
proper public purpose.
A State’s Right to Seize the Property
Under the customary international law, certain acquisitions by a state are non-
compensable153. But, whether, the application of this principle can be applied for
interpretation of a BIT is debatable. Other international instruments limit the kinds of
expropriation covered by protection. Such as “European Convention on Human Rights”
bars the absolute protection against expropriation. Article 1 of the Convention says:
"Every natural or legal person is entitled to the peaceful enjoyment of it
possessions. No one should be deprived of his possession except in the public
interest and subject to conditions provided for by law and by the general
principles of international law.
The preceding provisions shall not, however, in any way impair the right of a
State to enforce laws as it deems necessary to control the use of property in
accordance with the general interest or to secure payment of taxes or other
contributions or penalties".
The Convention starts with general limitation over obligation to compensate the
expropriation by host state. The convention has used following words "subject to the
conditions provided for by the law and general principles of international law". This
provisions ensures that the payment of compensation would be governed by principles of
international law. As per such principles of international law, there is limitation on the
instances, where the states control matters affecting police powers. The paragraph two of
Convention specifies limitation on the protection.
153 Saluka Investments BV (The Netherlands) v The Czech Republic (Partial Award, 17 March 2006) at [255]; Methanex Corp v USA, Final Award, 3 August 2005, 44 ILM 1343 at [410]. For examples of state practice see the Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens, the 1967 OECD Draft Convention on the Protection of Foreign Property (71 ILM 117), and the United States Third Restatement of the Law of Foreign Relations (1987).
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Defenses against Expropriation by the State
The defense of necessity is provided under Article 25 of the “International Law
Commission’s Articles on Responsibility of State for Internationally Wrongful Acts. This
article lays down conditions, where defense necessity can be invoked. These are as
under:-
(i) “The state's act is to safeguard an essential interest against a peril”;
(ii) “The peril shall be grave and imminent”;
(iii) “The course of action followed shall be the only option available”; and
(iv) “No other essential interest shall be seriously impaired as a result of the
breach”.
This article further stipulates conditions, where defense necessity does not exist. These
are as under:-
(i) “The international obligation in question excludes the possibility of
invoking necessity (i.e. the state renounces the defense)”; or
(ii) “The state has contributed to the situation of necessity”.
Generally, many agreements do not have any provisions on the issue. The India-
Australia BIT” under Article 15 states that:
“Nothing in this Agreement precludes the host Contracting Party from taking, in
accordance with its laws applied reasonably and on a non-discriminatory basis,
measures necessary for the protection of its own essential security interests or
for the prevention of diseases or pests”.
Likewise, Article XI of the “United States-Argentina BIT”, provides more or less
similar language in the following words:
“This treaty shall not preclude the application by either Party of measures
necessary for the maintenance of public order, the fulfilment of its obligations
with respect to the maintenance or restoration of international peace or
security, or the Protection of its own essential security interests”.
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The State of Hungary resorted to this doctrine as “ecological necessity” in
“Gabakovo Nagymaros Project”154. In this case, Hungary had an arrangement for raising
construction and operating different dams on the River Danube. Hungary subsequently
put the project in abeyance and thereafter, discontinued for the reasons that there was
political instability in the country and people of Hungary was also against the project and
they are criticizing it. On this issue, the International Court of Justice accepted the ground
of Hungary for stoppage of project that “the state of necessity is a ground recognized by
customary international law for precluding the wrongfulness of an act not in conformity
with an international obligation”, but on the other hand, considering factual background,
ICJ held that it was not for Hungary to resort to defense of necessity as a matter of right.
The concerns of the Hungary were acknowledged by ICP, but it was considered not to be
posing danger imminently to environment and the risks taken ground of by Hungary were
too remote and uncertain.
Economic Crises of Argentina in 1999-2002
Argentina in 1988 introduced new currency, the Austral. This introduction led
hyperinflation that brought serious issues and crises to wages. In order to tackle inflation,
Argentina govt. fixed the new currency against US dollars. The said fixation again did
not bring any rescue in debt of the country and by hardly a passage of two years, in 1990,
the Argentinian economy witnessed a slash in GDP. Ultimately, some emergency
measures including freezing of bank accounts were taken by the govt. in 2001. The
uncontrolled public debt of Argentina surged to US $ 130 billion, which caused social
instability and rioting. Due to said economic crises, Argentina govt. initiated some
emergency laws in 2002. These laws covers removal of indexation, restriction of
currency movement outward from Argentina and fixation of US dollars at a ratio of one-
to-one. Foreign investors considered it as s undervaluation exercise to their inward
investments in Argentina. Some of investors started claims against Argentina for
expropriation of their investments. In reply to claims, Argentina govt. relied on the “state
of necessity” doctrine in all cases (ICJ, 1997)155.
154 (Hungary/Slovakia), judgment, ICJ reports 1997, 7 155 For all cases of Argentina are available at <http://icsid/worldbank.org/ICSID/FrontServlet>
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In “LG & E Energy Corporation v. Argentine Republic”156, as per claim of LG &
E, it invested in Gas distribution companies of Argentina. After emergency laws, the
govt. of Argentina renegotiated agreements with these gas companies in order to remove
guarantees, which resulted into substantial loss to investment of LG & E. it invoked
provisions of US-Argentina BIT for its relief and Argentina after filing case took the
defense of necessity. The ICSID considered that “all these devastating conditions-
economic, political, social-in aggregate triggered the protections afforded under Article
IX of the Treaty to maintain order and control the civil unrest”, therefore, Argentina was
exempted from the crises as there was no concrete evidence that should have shown any
involvement of Argentinian govt. into the crisis. The tribunal granted exemption from
payment of damages only for specified period i.e. 1st December, 2001 to 26 April, 2003,
but thereafter, 26 April, 2003, it was liable to pay damages.
In second case “Continental Casualty Co Argentine Republic”157, the company
alleged that it received loss to their investment banking sector due to emergency laws and
sudden stay on outward transfer of money. It filed claims under the US Argentine BIT
and Argentina likewise amongst other invoked Article XI of the treaty as defense
necessity. Interestingly, tribunal concluded that necessity in favor of the Argentina
existed and it was justified for it to invoke doctrine to its aid. The tribunal concluded as
follows”
“The fact that Argentina's Congress declared a "public emergency" in
economic, financial, exchange, social and administrative matters in conformity
with Art. 76 of its Constitution, and enacted a specific "Public Emergency Law"
to cope with the crisis, powerful evidence of its gravity such as that could not be
addressed by ordinary measures. “158
The tribunal held that in view of severity of crises, the Argentinian did not has
any other alternatives but to introduce emergency like in the case of LG&E, tribunal held
156 ICSID Case No.ARB/02/1 157 ICSID Case No.ARB/03/9 158 ICSID Case No.ARB/03/9 at [181]
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that the state itself did not contribute to the crises, therefore, it is exempted from payment
of damages for expropriation.
1.10 PREFERENTIAL TRADE AND INVESTMENT AGREEMENTS, (PTIAS)
PTIAs are also international agreements concluded by countries to achieve
international economic cooperation, whereby, the factors’ production are transferred
across borders. Under International Law, they can vary from type to type. There can be
“Economic Integration Agreements”, “Free Trade Agreements (FTAs)”, “Economic
Partnership Agreements (EPAs)” or such other kinds of agreement covering foreign
investment. In these types of treaty, only a small part of section relates to foreign
investment. Other issues that are covered in PTIAs are “trade in goods and services,
tariffs and non-tariff barriers, customs procedures, specific provision pertaining to
selected sectors, compensation, intellectual property and temporary entry of people”.
There are many PTIAs enforced around the world. The famous PTIA is “North American
Free Trade Agreement (NAFTA)” executed between “Canada, Mexico and USA”. The
Chapter II lays down provisions over foreign investment similar to those found in
BITs159.
Internationally, World investment and trade are regulated in their separate legal
regimes. For instance, world trade was used to be organized by GATT and thereafter
WTO, whereas rules for investment and their protection were largely found mention in
BITs. In past practice, investment treaties are formulated on the basis of model of
Herman Joseph Abs, and Lord Hartley Showcross. It was “the Draft Convention on
Investments Aboard” (Stephan W Schill., 2009)160. Over the last few years, IIAs saw
diversity in its texts. Though, the traditional BITs are still concluded, but they have taken
more detailed shape. The investment rules were not used in narrow sense, but often
embed in PTIAs that organize trade and investment. This is some of important
development trend which shows the complex side of international investment law
159 North American Free Trade Agreement (NAFTA)-SICE-Foreign Trade Information System. 160 Initially published in (1960) 9 Journal of Public Law 116-118, available in Christian J Tams and Christian Tietje (eds), Documents in International Economic Law. Trade – Investment – Finance (OUP 2012) 358-360. The Abs-Shawcross Draft heavily influenced the 1967 OECD Draft Convention on the Protection of Foreign Property, (1963) 2 ILM 241-267, which in turn influenced the model treaties of most OECD countries. For background and references. See Stephan W Schill. (2009). The Multilateralization of International Investment Law (CUP) 35-40.
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(Stephan W Schill and Marc Jacob., 2013)161. The rise of PTIAs and its combining with
investment and trade rules was due to criticism against investment laws and arbitration
(Michael Waibel, Asha Kaushal, Kyo-Hwa Liz Chung and Claire Balchin., 2010)162,
which resulted into “recalibration” of investment treaties. Recalibration is new concept,
whereby a range of modifications in the traditional sources of international investment
law are suggested (José Alvarez.,2010)163. The PTIAs is latest trend in international
investment law. The number of PTIAs has rapidly surged from 1990s, following
conclusion of NAFTA. The PTIAs are not based on one treaty model comprising both
rules of investment and trade, rather they are in different shapes. The World Investment
Report, 2012 (UNCTAD, 2012)164 defines PTIAs categories into following words:-
“Other IIAs, which include agreements such as free trade agreements or economic
partnership agreements, continue to fall into one of three categories: IIAs
including obligations commonly found in BITs (9); agreements with limited
investment-related provisions (2); and IIAs focusing on investment cooperation
and/or providing for a future negotiating mandate on investment (3)”.
The rise of PTIAs are seen as a threat as well as a chance. Combination of both
trade and investment rules in a single instrument, PTIAs in a way serve the purpose of
legal regulation of cross border economic activities. This is because trade and investment
are interlinked (Tomer Broude., 2003)165. The example of this global supply chain,
whereby components of end-products are produced in different countries and
subsequently marketed worldwide (UNCTAD, 2011)166. This combination of PTIAs is
considered a clash between two systems. As per world trade law, regional integration
161 Stephan W Schill and Marc Jacob. (2013). Trends in International Investment Agreements, 2010-2011: The Increasing Complexity of International Investment Law’ in Karl P Sauvant (ed), Yearbook on International Investment Law and Policy 2011/2012 (OUP 2013) 141. 162 Michael Waibel, Asha Kaushal, Kyo-Hwa Liz Chung and Claire Balchin. (2010). The Backlash Against Investment Arbitration. (eds), (Kluwer Law International). 163 José Alvarez. (2010). Why are we Re-calibrating our Investment Treaties?. World Arbitration & Mediation Review 143. 164 UNCTAD, World Investment Report 2012: Towards a New Generation of Investment Policies (2012) <http://www.unctad-docs.org/UNCTAD-WIR2012-Full-en.pdf> accessed 5 February 2015. 165 Tomer Broude. (2003, January 13). Investment and Trade: The Lottie and Lisa of International Economic Law?’ (Hebrew University of Jerusalem Legal Studies Research Paper No. 10-11). Retrieved http://ssrn.com/abstract=1957686 . 166 The point is explored in the contributions of Johnston/Trebilcock and Bungenberg, in this volume; see also Kazunobu Hayakawa and Nobuaki Yamashita, ‘The Role of Preferential Trade Agreements (PTAs) in Facilitating Global Production Networks’ (2011) 45, Journal of World Trade 1181; UNCTAD, World Investment Report 2011: Non-Equity Modes of International Production and Development (2011) 124 http://www.unctaddocs.org/files/UNCTAD-WIR2011-Full-en.pdf
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through PTIAs is a threat to “Spaghetti Bowl” (Peter Sutherland et al., 2004)167. In order
to find out as to whether there is any linkage between BIT and PTAs, Tobin and Busch
used the data in between 1960 to 2000 focusing developing countries and developed
countries and concluded as under:-
“BITs raise the prospects of getting a North-South PTA with all the deeper and
reciprocal obligations that these entail” (J.Tobin and M.Busch. 2010)168.
Comparing PTAs with BIT, it is revealed that PTAs have impacted more on the decision
making of investors investing abroad as compared to BITs. In other words, BITs are not
responsible for increase of investment in host countries rather they might influence the
likeliness of further investments agreement (UNCTAD, 2009)169.
1.11 INTERNATIONAL TAXATION AGREEMENTS
This is another type of investment agreement. It is also called Double taxation
Agreement or Tax treaty. The purposes of this kind of treaty is to regulate the taxes on
the global income of multinational corporations and their distributions among the
countries. The emphasis of this treaty is to avoid double taxation. The main problem on
the taxation issue is on the disagreements between countries as to which country has
jurisdiction over the taxable income of these corporations. Such conflicts are the integral
and main part of these treaties. In contemporary treaty practice, avoidance of double
taxation is achieved by applying two distinct approaches, i.e. residence and income,
which has evolved the double taxation. The second way to avoid double taxation through
three methodology. First is credit method in which foreign tax deducted in another
country is credited against tax paid in the residence country. Second is exemption method
167 See the discussion in Peter Sutherlund et al. (2004). The Future of the WTO – Addressing Institutional Challenges in the New Millennium. 19-27 http://www.wto.org/english/thewto_e/10anniv_e/future_wto_e.pdf. For a more recent analysis of PTAs see World Trade Organization, World Trade Report 2011 - The WTO and Preferential Trade Agreements From Co-existence to Coherence (2011) 40 et seq http://www.wto.org/english/res_e/booksp_e/anrep_e/world_trade_report11_e.pdf; see also the contributions in Kyle W Bagwell and Petros C Mavroidis (eds), Preferential Trade Agreements – A Law and Economics Analysis (CUP 2011). 168 J.Tobin and M.Busch. (2010). A BIT is better that a lot: Bilateral Investment Treaties and Preferential Trade Agreements. 62 World Politics 1. at 31. 169 UNCTAD. (2009). The role of international investment agreements in attracting foreign direct investment to developing countries (Geneva: United Nations), ch.3
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in which foreign income and taxation is immaterial for residence country (UNCTAD,
2004)170.
The purposes of these tax agreements to avoid double taxation. These treaties
cover almost every tax category from income tax to value added taxes171. Tax treaties can
also be multilaterally by economic block. Like, EU member states have already executed
a multilateral agreement for value added taxes. Tax treaties are international arrangement
between countries to reduce double taxation of the same income. It also prohibits tax
evasion and enhance border trade efficiency. Double taxation treaties are based on OECD
Model Convention172. The other models are the UN Model Convention173 in the case of
treaties with developing countries and US Model Convention in the case of treaties
negotiated by US. The tax residents of either executing state can benefit from tax
treaties174. As per Article 4 of the OECD Model, the tax resident of a country is a person
that is subjected to the domestic laws covering subjects such as domicile, resident, place
of incorporation, or similar criteria. The tax residents vary from country to country.
Sometimes, it is considered on the basis of primary place of abode175. While other
countries treat a person spending a specified no of days in another country as tax
residents, whereas, the US treats citizens and green card holders, wherever, they are
living as tax residents for tax treaty purpose. Most treaties emphasizes that the profit of
business of a resident of one country are subject to tax in the other country if these profits
arise through a permanent establishment. In this regards, certain treaties separately define
what permanent establishment are. But some of tax treaties follows the definition of PE
in the “OECD Model Treaty”176. As per OECD definition, a PE is fixed place of business
through which the business of an enterprise is carried on. These also include branches,
offices, workshops, and others outlets. Many tax systems lays down procedural
regulations whereby collection of the tax from nonresident by requiring payers of certain
types of income to withhold tax from the payment and remit it to the tax authorities.
These withholding areas are applicable to interest, dividends, royalties and payments for
170 UNCTAD. (2004). International Investment Agreements: Key issues. Vol. II. New York and Geneva. Pp. 203, 208-209 171 Agreements on tariffs, while technically tax treaties are generally called agreements on tariff and trade. 172 OECD Model Tax Convention (2014 version) 173 UN Model convention (2011 version) 174 Article 1 of the OECD Model Tax Convention on Income and on Capital 175 See tax treaty between Canada and Belgium, article 4, http://www.fin.gc.ca/treaties-conventions/Belgium_-eng.asp 176 Contrast of U.S/Italy treaty using exact OECD language with the U.S/India treaty that has numerous special provisions.
46
technical assistance. Special treatment of reduction or elimination of certain amount of
tax required to be withheld with respect to residents of a treaty country. Likewise, special
arrangement on income from employment is also made in these tax treaty, where income
of one country is subjected to taxation, then the same income would cannot be subjected
to taxation in other country as it would be exempt. These treaties also contain provisions
relating to tax exemptions. For examples, if one entity is exempt from tax in one country
are also exempt from tax in other. Another landmark of the tax treaty is uniform tax rate
on same type of income. Sometimes, tax treaty also contain mutual enforcement
mechanism as tax payer of one country may relocate themselves and their assets to avoid
paying taxes. The tax treaty also contain dispute resolution clause. Under treaty the govt.
agencies are responsible for conducting disputes resolution procedures under the treaty is
referred to as the competent authority.
1.12 HISTORY OF INTERNATIONAL INVESTMENT RULEMAKING
In past, the international investment mechanism can be divided into two separate
ways. First phase consists of 1945 to 1989. This period witnessed disagreements between
countries about degree of protection available to foreign investors. Most developed
countries argued that minimum standard of treatment in any host countries should be
accorded. Whereas, the developing and Socialist countries were of opinion that foreign
investors should be treated different than the national firms. In 1959, the first BITs were
concluded, much of content that forms the basis of a majority of the BITs were developed
and refined. In 1965, ICSID was established to provide an institution that facilitates the
arbitration of investors’ states disputes (UNCTAD, 2008)177.
Second phase began from 1989 to today, which witnessed a substantial increase in
BITs. This was due to the opening up of many developing countries to foreign
investment, the mid of 1990 also saw the creation of three multilateral agreements that
covered investment issues as part of Uruguay Round of Trade Negotiations and Creation
of WTO. These were “General Agreement on Trade in services (GATs), the Agreements
on Trade Related Investment Measures (TRIMs), and the Agreement on Trade Related
177UNCTAD. (2008). International Investment Rulemaking, Stocktaking, Challenges and the Way forward. New York and Geneva. pp 9-19
47
Aspects of Intellectual Property Rights (TRIPs)”. This era also saw growth of PTIAs,
NAFTA in 1992 and the establishment of ASEAN Framework Agreement on the
ASEAN Investment Area in 1998. These agreements contributed to a large extent to
liberalization of investment more intensively.
“International investment Agreements” or “IIAs” are more transforming itself by
entering a new phase of regional agreements. Such as European Union, North American
Free Trade Agreement, that would supplant traditional bilateral Agreements. Moreover,
the numbers of investor state cases have been on rise in recent years. By the end of 2008,
the total number of investment related cases reached 317 (UNCTAD, 2009)178. Another,
trendy feature of different agreements has been termed as “Spaghetti Bowl”. According
to UNCTAD, practically every country has concluded one IIAs. This system is
multilayered with agreements being signed at all levels. (Bilateral, Sectoral and
Regional). In this system, IIAs include provisions on issues such as trade, intellectual
property, labor rights and environmental protection. For example, recent trends in IIAs
tend to include provisions addressing issues such as public health, safety, national
security and the environment. In past, a lot of several initiatives for establishment of a
more multilateral approach to International investment rule-making was done. These
included “Havana Charter of 1948”, “the United nations Draft Code of Conduct on
Transnational Corporations in 1980s” and “Multilateral Agreement on Investment (MAI)
of the Organization for Economic Cooperation and Development (OECD) in 1990s”.
1.13 INVESTMENT POLICY FRAMEWORK FOR SUSTAINABLE
DEVELOPMENT
UNCTAD has published the “Investment Policy Framework for Sustainable
Development (IPFSD)”, which is important document made to help govts formulate
sound investment policy intended to capitalize on Foreign Direct Investment (FDI) for
sustainable development. This policy framework intends to promote a new generation of
IIAs by offering investment policy maker to formulate their national and international
investment policies. For this purpose, IPFSD defines eleven critical core principles.
178UNCTAD. (2009). IIA monitor No.1, latest developments in investor-state dispute settlement. New York and Geneva, page 2
48
These include such as state guidelines and advice on formulating good investment policy
to enhance sustainable development and value of investment policies. IPFSD also
established online interactive platform and the investment policy Hub, in which
stakeholders participate to critically assess policy guidelines and recommend and
appropriate changes. Likewise, International Chamber of Commerce issued Guidelines
for International Investment in 2012 for International Investment updating its 1972
recommendations. These guidelines are “affirmations of fundamental principles for
investment set out by business community in 1972 as essentials for further economic
development”. It is hoped that these guidelines would be useful for investors and govts
alike in creating more level playing environment for cross-border investment and in
understanding shared responsibilities and opportunities179.
1.14 EFFECTS OF BIT ON DEVELOPING COUNTRIES
The purpose of foreign investment of developing countries are to attract most
sought after foreign investment (FDI), which has its own rewards and benefits (Gordon
Hanson, 2001)180. These benefits includes economic wellbeing, well-planned
infrastructure, training work force and technological transfer capable of enhancing the
effectiveness of host countries’ firms (Aitken et al., 1997)181. Evidences also suggest that
foreign investment have also increased investment stocks of progressing country as the
foreign investment in case of financial crisis for host countries would less likely to leave
the country (Robert E.Lipsey., 2000)182. While bringing investment by multinational firm
into host countries, they also bring devastating competition with local firms creating
monopoly in the host market whereby local firms do not progress as the multinational
firms do (UNCTAD, 2003)183. In 1902, one of the international instrument for increase of
foreign investment for host countries was bilateral investment treaties, which saw an
179 See “Guidelines for International Investment” from http://www.iccwbo.org/Advocacy-Codes-and-Rules/Dcoument-Centre/2012/20 12-ICC-Guidlines-for-Interntional-Investment/ 180 Gordon Hanson. (2001). Should Countries Promote Foreign Direct Investment?. U.N.Doc.UNCTAD/GDS/MDPB/G24/9 (G-24 Discussion Paper No.9, 2001), available at http://www.unctad.org/en/docs/pogdsmdpbg24d9.en.pdf.Hanson discusses recent trends in investment promotion by developing countries. 181 Aitken et al. (1997). Spillovers, Foreign Investment, and Export Behavior. 43 J. of INT’L ECON.103. 182 Robert E.Lipsey. (2000). The Role of Foreign Direct Investment in International Capital Flows. (Nat’l Bureau of Econ.Res_, Working paper No.7094, 2000). In this Book author provides evidences that FDI is less likely to leave developing countries in time of financial crisis when compared with portfolio capital investments. 183 UNCTAD. World Investment Report 2003, FDI Policies for Development: National and International Perspectives, UN.Doc.UNCTAD/WIR/2003 (Sept, 4, 2003). Retrieved http://www.unctad.org/en/docs/wir2003_en.pdf
49
increase within the passage of time (UNCTAD, 2000)184. The recent uprise in foreign
investment was due to enhanced motivation of countries to use BITs as tools to provide
investors the attractive investment scenario. Some of the explorer rather gave disturbing
conclusion that BITs are not related with large increases in foreign investment (Mary
Hallward Driemeier., 2003)185, which happens only after five years of signing BIT.
Another analyst, Tobin and Rose-Ackerman has also concluded disappointingly
that neither BITs increases foreign investment flows nor they improve the local
investment environment in host countries (Jennifer Tobin and Susan Rose-Ackerman.,
2005)186. In order to investigate these queries, some analysts [Salacuse and Sullivan and
Neumayer and Spess] carried some study, where they located a positive linkage between
signing BITs and foreign investment received by host countries (Jeswald Salacuse and
Nicholas Sullivan., 2005)187. Under BITs, the developing countries in a way transfer
some of their rights over movable and immovable properties to global investor (Bhagirath
Lal Das., 2003)188, which is also significant factor against BITs and investment. As per
Hallward-Driemeier189, investment under BIT received by developing countries from
investors in organization for Economic Cooperation and Development (OECD) countries
were covered by promises and protections of BIT. The question which ponders the mind
is as to whether host countries can afford an adequate exchange for these promises to
foreign investors. The answer lies in the study of Zachary Elkins (Zachary Elkins et al.,
2005)190, who uses cox analysis and examine whether competition with other countries
influenced the motives of countries.
Singing of BIT is an important factor as it assures the foreign investor of safety of
their investment in host countries as these countries are having some level of risk that
184 UNCTAD. (2000, Dec, 15). Bilateral Investment Treaties 1959-1999, U.N.Doc UNCTAD/ITE/IIA/2. Retrieved http://www.unctad.org/en/docs/poiteiiad2.en.pdf 185 Mary Hallward Driemeier.(2003). Do Bilateral Investment Treaties Attract Foreign Direct Investment? Only a Bit and they could Bite. (World Bank Policy Research, working Paper series No.WPS 3121, 2003). Retrieved http://econ.worldbank.org/files/ 29143_wps3121.pdf 186Jennifer Tobin and Susan Rose-Ackerman. (2005). Foreign Direct Investment and the Business Environment in Developing Countries: the impact of Bilateral Investment Treaties. (Yale Law and Economics Research Paper No.293). Retrieved http://www.law.yale.edu/outside/html/faculty/sroseact/FDI_BITs_may02.pdf 187Jeswald Salacuse and Nicholas Sullivan. (2005). Do BITs Really Work? An Evaluation of Bilateral Investment Treaties and Their Grand Bargain. 46 HARV, INT’L L.J.67. 188Bhagirath Lal Das. (July, 2003). A Critical. Analysis of the Proposed Investment Treaty in WTO. Global Policy Forum. http://www.globalpolicy.org/socecon/bwi_wto?wto/2003/07critical.htm 189See supra note. 185. 190Zachary Elkins et al. (2005). Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960-2000. (UC Berkeley Public Law Research Paper No.578961. who uses cox analysis and examine whether competition with other countries influenced the motives of countries.
50
would not have compelled the investor to invest into country191, therefore, there is link
between both per capita and country risk and the signing of BITs. Sometimes, the
countries are also tended to sign BIT because of the fact that they are concerned about if
BIT is not signed, then foreign investment in their countries may flow out and relocate to
neighbors of that countries that just signed their own BITs with key investment countries.
Due to this apprehension, the trend has been witnessed in signing BITs to compete in the
investment market (Deborah L.Swenson.,1998)192. Signing of BITs has another
important aspect as after signing of BIT, that country would get enhanced foreign
investment as special reward as the firms who has already invested in host countries
would be at comfort level to make more investment because that investment is now
protected under newly signed BIT, that would protect their profits and slash the
uncertainty about the application of laws to their investments. According to (Sornarajah,
1986), is of the view that “in reality attracting foreign investment depends more on the
political and economic climate for its existence rather than on the creation of a legal
structure for its protection”193. The similar view is also given by some experts at the
United Nations Conference on trade and Development in the year 1997 (Raghavan, C.,
1997)194, therefore, due to this reason some of major host countries like Brazil and
Mexico did not sign BIT for a long time. The FDI inflows are not dependent upon
BIT as there are many example of host countries with huge inward FDIs with few
BITs (UNCTAD, 1998)195.
Recently, the BITs have been subjected to political controversies because of the
fact that these are causing unnecessary investor-state disputes between investors and host
countries. The developing countries less benefit from BIT due to risk of litigation. The
data of ICSID and other arbitration forums shows that the investors have resorted to a
huge number of claims against host countries that signed BIT with home countries,
therefore the need is pressed for over-all new treaty regime, which could promote foreign
191See Hallward-Driemeier, Supra note 185 192Deborah L.Swenson. (1998). The Effect of U.S,State Tax and Investment Promotion Policy on the Distribution of Inward Direct investment, in Geography and Ownership as bases for economic Accounting 285. J.David Richardson, Robert Lipsey and Robert E.Baldwin eds. showing that one identifies bigger effect of taxes on foreign investment in the U.S., if one controls taxes of competing neighbor states. 193 Sornarajah, M. (1986), State responsibility and bilateral investment treaties Journal of World Trade Law, 20, 79-80. 194 Raghavan, C. (1997), Bilateral Investment Treaties Play only a minor role in attracting FDI. Third world Economics, 162, 1-15. 195 UNCTAD. (1998). P.141, Bilateral Investment Treaties in the mid 1990, New York and Geneva: united Nations.
51
investment in essence and deprecate investor-state disputes. Furthermore, host countries
may be able to organize foreign investment given their public policies (Uma
Kollamparambil., 2016)196. Most of the time, BITs are considered by developing
countries as a good source of economic well-being as they bring latest technology and
equipment etc. In these BITs, due to unawareness of international investment laws, the
experts focus on bringing in the investment into their economy, they are least bothered
for the outcome, these BITs would lateron bring on host countries’ economies. Due to
this abrupt surprise, at least forty five states and some four economic block are revising
their model BIT templates containing renewed clauses on MFN status and sustainable
development.
The importance of FDI for developing countries cannot be denied. It works as a
blood for these countries. They are considered a success milestones for allocation of fund
and technology. After 1970, the flow of FDI has grown at more than twice the pace of
growth worldwide. In 2003, FDI was the largest components of the net resources flows to
developing countries and this would for all time to come in future (UNCTAD, 2003)197.
The first Bit was executed between Germany and Pakistan in 1959. After that, it took
almost two decades for BIT to become popular. Till 1960s, almost 75 Treaties were
signed, which rate increased to 167 by the year 1970s and 389 by the end of 1980s. This
growth did not stop and by 2002, there were 2181 BITs worldwide (UNCTAD, 2003)198.
Prior to BIT, the only protection for foreign investors was the customary international
legal rule of minimum standard of treatment and the Hull rule. The minimum standard
provided for a limited standard of treatment, whereas the Hull rule covers exclusively
with cases of expropriation and did not provided for general protection against
discriminatory treatment. This Hull rule arose from the dispute between Mexico and the
US in 1930s over the properties by the govt. of Mexico. During diplomatic notes, the US
Secretary of State Cordell Hull stated that “no government is entitled to expropriate
private property, for whatever purpose, without provision for prompt, adequate, and
196 Uma Kollamparambil. (2016, June, 20). Why developing countries are dumping investment treaties. University of the Witwatersrand, Johannesburg. Retrieved www.wits.za/news/latest-news/in-their-own-words/2016/2016-03/why-developing-countires-are-dumping-investment-treaties.html 197UNCTAD. (2003). World Investment Report 2003: FDI Policies for development national and international perspectives, New York and Geneva: United Nations. 198 Ibid, UNCTAD, 2003, note 197.
52
effective payment therefore” (Guzman, A., 1998)199. The hull Rule is disputed to
customary international law. This rule was gradually changed by developing countries for
a demand of New International Economic Order. Resolution 1803 of General Assembly
requires “appropriate compensation” for expropriation (Ginsberg, T., 2004)200.
On one hand the developing countries resisted the Hull rule, but on the other
hand, these countries began to sign on BITs that contain similar and indeed more far
reaching provisions. The basic provisions of BIT provides for Standard treatment to
foreign investors (Dolzer, R., & Stevens, M., 1995)201. Due to certain clauses like
national treatment and most favored Nation treatment shows that foreign investors are
often granted higher security and better treatment than domestic investors (Vandevelde,
K., 1998)202. The interference with local regulatory legal regime of developing countries
is rampant. Infact, any public policy regulation can be challenged through the dispute
settlement mechanism so far as it affects foreign investors. Most of the time, foreign
investors are ought not to exhaust domestic legal remedies and thus they can bypass or
avoid national legal systems by only choosing three panelists where their consensus is
needed for one other panelists and where they expect that rules laid down in BITs are
fully applied (Peterson, L.E. 2004)203. This contrast with domestic courts, where
investors have no say on the composition of judges and where domestic rules might
trump BIT provisions, In the words of Vandevelde, “BITs seriously restrict the ability of
host states to regulate foreign investment” (Vandevelde, K., 2000)204. However, in
concluding BITs, developing countries are therefore, “trading sovereignty for credibility”
(Elkins, Z. Guzman, A., & Simmons, B., 2004)205.
199Guzman, A. (1998). Why LDCs signs treaties that hurt them: Explaining the popularity of bilateral investment treaties. Virginia Journal of International Law, 38, 639-688 200Ginsberg, T. (2004). International Substitutes for domestic institutions: Bilateral investment treaties and governance. Working Paper. University of Illinois College of Law. 201 Dolzer, R., & Stevens, M. (1995). Bilateral investment treaties. The Hague: Martinus Nijhoff Publishers. See also UNCTAD, 1998, Bilateral investment treaties in the mid-1990s. New York and Geneva: United Nations. 202 Vandevelde, K. (1998). The Political economy of a bilateral investment treaty. The American Journal of International Law, 92(a), 621-641. 203 Peterson, L.E. (2004). Bilateral Investment Treaties and Development Policy-Making. Winnipeg: International Institutes for Sustainable Development. 204 Vandevelde, K. (2000). The economics of bilateral investment treaties. Harvard International Law Journal, 42(2), 469-502 205 Elkins, Z. Guzman, A., & Simmons, B. (2004). Competing for Capital: The diffusion of bilateral investment treaties, 1960-2000. Working paper, university of Illinois, University of California at Berkeley and Harvard University.
53
1.15 INTERNATIONAL CENTRE FOR SETTLEMENT OF
INVESTMENT DISPUTES (ICSID)
International Center for settlement of Investment Disputes (ICSID) is an
international institution established by World Bank to resolve the disputes between the
investor and host countries. This institute is subsidiary of World Bank and is approached
where the investment disputes have cropped up between the parties on various investment
issues. This center is progressively tackling the issues of investment and has vibrantly
given not only their award but also have enforced them between the countries at issues206.
The ICSID was established by the “Convention on the Settlement of Investment
Disputes” amongst States and Nationals of Other States, which came into existence in
1966. This is primarily ratified by 20 countries. Till December 2002, as 136 economies
have ratified the Convention to become Contracting States. ICSID provides platform for
arbitration and conciliation of disputes between member countries and investors which
are nationals of other member countries. The approach to ICSID facilities and arbitration
is entirely voluntary. However, once the parties have consented to arbitration under the
ICSID Convention, none of them can unilaterally withdraw its consent. Moreover, all
ICSID Contracting States, whether or not parties to the dispute, are required by the
Convention to recognize and enforce ICSID arbitral awards. Provisions on ICSID
arbitration are commonly found in investment contracts amongst governments of member
countries and investors from other member countries. Advance consents by governments
to submit investment disputes to ICSID arbitration can also be found in about twenty
investment laws and over 900 bilateral investment agreements. Similarly, ICSID
arbitration is one of the primary mechanisms for the settlement of investment disputes
under recent multilateral trade and investment treaties such as “the North American Free
Trade Agreement, the Energy Charter Treaty, the Cartagena Free Trade Agreement, and
the Colonia Investment Protocol of Mercosur”.
The purpose of ICSID is to resolve disputes between state and foreign investors
over their respective rights arising out of BIT arbitrations. It is working under the World
206 ICT. (2016, June, 20). International Center for Settlement of Investment Disputes. Retrieved http://www.ictregulationtoolkit. org/en/toolkit/notes/PracticeNote/1880
54
Bank and is located in Washington D.C. (USA). It was established in 1965 by the
Convention of the settlement of Investment Disputes between State and National of other
states (known as the ICSID convention or Washington Convention) (World Bank,
2015)207. The ICSID does not itself arbitrate disputes but provides rules and regulations
over procedures for conducting independent arbitration tribunal to resolve disputes208.
Normally, the proceedings are held in headquarters in Washington D.C. However, by
mutual arrangement, the proceedings may take place in another location where ICSID has
sub arrangement or facilities. These locations (ICSID, 2015)209 as under:-
1) “Permanent Court of Arbitration at the Hague”;
2) “Regional Arbitration Centers of the Asian African Legal consultative Committee
at Cairo, at Kuala Lumpur and at Lagos”;
3) “Australian Commercial Disputes Centre at Sydney”;
4) “Australian Centre for International Commercial Arbitration at Melbourne”;
5) “Singapore International Arbitration Centre”;
6) “Gulf Cooperation Council Commercial Arbitration Centre at Bahrain”;
7) “German Institute of Arbitration”; and
8) “Maxwell Chambers, Singapore”
The pre-requisite of bringing a dispute to ICSID is by “Contracting State210” if it
deems that there is violation of ICSID agreement caused by national of another state or
vice versa. The nature of dispute must be legal directly cropping up from the subject of
“investment”. Submission of disputes must also be in writing211. The provisions of ICSID
are treated an integral part of investment contracts. Advance consents by govt. to submit
their disputes can be found in twenty laws and over 900 bilateral investment
agreements212. Similarly, ICSID has been made primary mechanism for settlement of
investment disputes under four recent multilateral trade and investment treaties. These are
“North-American Free trade Agreement, The Energy Charter Treaty, The Cartagena Free
207 World Bank. (2015, Dec 29). International Centre for Settlement of Investment Disputes. Retrieved www.worldbank.org/icsid/ about.htm 208 See also Report of the Executive Directors on the Convention, para. 15, 1 ICSID Reports 26. 209 International Centre for Settlement of Investment Disputes. (2015, Dec 29). “Institutional Arrangements”, World Bank Group. Retrieved www.worldbank.org/icsid/about.htm 210 A complete list of ICSID contracting states are available at www.worldbank.org/icsid/constate/c.states-en.htm 211 www.interntionalarbitrationlaw.com/arbitral-instituions/icsid/ 212 A complete list of treaties is provided at www.worldbank.org/icsid/treaties/treaties.htm
55
Trade Agreement, and the Colonia Investment Protocol of Mercosur”. It also published
ICSID Review-Foreign Investment Law Journal213. The purpose of ICSID was to provide
an autonomous, multilateral specialized institutions to encourage international flow of
investment through treaty drafted by Executive Directors of International Bank for
Reconstruction and Development (ICSID, 2015)214.
Article 25 of the ICSID convention is core provisions of law, which governs
investment over last 20 years, a large number of cases were filed at ICSID due to
increased number of bilateral investment treaties. As a result there have been some
important decision on the application of Article 25. At the time of drafting ICSID
Convention, various definition were discussed by the Legal Committee. “None of these
proved acceptable. The large majority had moreover, agreed that while it might be
difficult to define “investment” as investment was infact readily recognizable”215. ICSID
for ease and future reference has itself defined the criteria that are applied to assist it to
decide as to whether any transaction is an investment or not; these are as under216:-
a) A certain duration
b) Regularity of Profit and Return
c) Assumption of Risk
d) Substantial Commitment
e) Significant for host state development.
1. Historical Background
In 1950 and 1960, the Organization for European Economic Cooperation now the
Organization for Economic Cooperation and Development) deliberated several ways to
create a legal framework for protection of international investment, but they faced
bottleneck on the issue to provide compensation for the expropriation of Foreign Direct
213 Complete list of Foreign Investment Law journal are available at www.icsidreview.oxfordjournals.org/content/by/year 214 International Centre for Settlement of Investment Disputes. (2015, Dec 29). “Organizational Structure of ICSID, World Bank Group retrieved www.worldbank.org 215 ICSID, History of the ICSID Convention: Documents Concerning the Origin and the Formulation of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Vol. 1I-2 p. 972 para. 65. Also referred to in the ad hoc committee decision on annulment of 1 November 2006 in Patrick Mitchell v. Democratic Republic of the Congo, ICSID Case No. ARB/99/7, para. 34. 216 These were first identified in the Award on Jurisdiction of 11 July 1997 in Fedax NV v. The Republic of Venezuela, ICSID Case No. ARB/96/3 para. 43 which refers to the Commentary by C. Schreuer
56
Investment. In 1961, the then General Counsel of International Bank for Reconstruction
and Development (IBRD) Aron Broche idealized that a multilateral agreement on a
process for resolving investment dispute can be created for resolving emerging
investment disputes. For this purpose, he held conference around the world to have
opinion from legal minds of different part of world to discuss and compose a preliminary
agreement, the IBRD staff wrote an official draft of the agreement and consulted with
legal representative of the IBRD’s Board of Directors to finalize the draft and have it
approved, which was finally approved and was named “Convention on the Settlement of
Investment Disputes Between States and Nationals of other States. The same was ready
for signature on 14 October, 1965, twenty states immediately ratified it (Reed, et al,
2010) 217. With advent of 21st Century, its first decade witnessed a numbers of bilateral
Investment Treaties (BITs) reaching more than 2500 by 2007. Many treaties contain text
relating to disputes referable to ICSID (Weisbrot, Mark)218.
ICSID is governed by its Administrative Council, which meets annually to elect
its Secretary General and Deputy Secretary General and approves rules and regulations.
The council consists of one representative from each contracting members’ states and is
chaired by the President of the World Bank Group. The ICSID’s normal operation carried
out by its Secretariat, which comprises 40 employees and it is supervised by Secretary
General of ICSID. The Secretariat provides support to the Administrative Council in
conducting the Centre’s proceedings. The affairs of Center of Conciliators and Panel of
Arbitrators also came under their Supervisions. Each contracting member state may
appoint four persons to each panel. The contracting member states of ICSID convention
is as many as 151, whereas the total members are 158 United Nations Members States.
The above 151 have ratified the Convention (ICSID, 2015)219. Former members Bolivia
and Ecuador withdrew their membership in 2009 (Tamil, Guido Santiago, 2011)220. By
law every member states whether party to the disputes or not are required by ICSID
217Reed, Lucy; Paulson, Jan; Blackaby, Nigel (2010). Guide to ICSID Arbitrations, 2nd Edition. The Hague, Netherlands: Kluwer Law International. ISBN 978-9-04-113401-1 218Weisbrot, Mark. ICSID in Cross hairs: Bolivia, Venezuela and Nicaragua slam the door. RISAL. Retrieved risal.colelctifs.net/ article.php3?id_article=2298 219International Center for Settlement of Disputes. Contracting States. (2015, Dec 22). World bank Group. Retrieved www.worldbank. org/icsid 220Tamil, Guido Santiago (2011). “On the Internalization of Administrative Contracts, Arbitration and the Calvo Doctrine.” In Jan Berg, Albert, Arbitration, Advocacy in changing times; Kluwer Law International pp 345-346. “Ecuador notified its withdrawal from the ICSID convention on 06-07-2009
57
convention to recognize and enforce ICSID arbitral awards. There are non-contracting
signatories to the convention, those have signed the convention, but have not ratified it.
1) Belize (1986)
2) Dominican Republic (2000)
3) Ethiopia (1965)
4) Guinea-Bissau (1991)
5) Kyrgyzstan (1995)
6) Namibia (1998)
7) Russia (1992)
8) Thailand (1985)
Whereas Brazil, Mexico, India and South Africa are countries with large
economies that have never been ICSID members.
2. Procedural Support of ICSID
The ICSID does not carry out arbitration proceedings itself, but instead offer
procedural and institutional support to commission, tribunals involves in such matters.
The Centre has two sets of rules that is pre-qualification as to how cases would be
conducted either in consonance with “ICSID’s Convention, Regulations and Rules or the
ICSID’s Additional Facility Rules”. To qualify as dispute referable to ICSID, it is
necessary that the disputes must be between a contracting state or and individual of
another state. The dispute must of legal nature and relate to investment. Exceptional cases
are processed under Additional Facility Rules where the parties to the dispute is not
contracting member state of national of contracting state. However, the most of the cases
are dealt under ICSID convention (ICSID 2011)221 (ICSID 2010)222 (Goldman, Michael,
2007)223. Recourse to ICSID convention is voluntary. However, once the consent is
given, neither party can unilaterally withdraw its consent (ICSID, 2015)224. The
significant feature of ICSID is dispute resolution under other treaties and assistance to
221 See ICSID 2011, Annual Report retrieved from icsid.wordlbank.org 222 See ICSID 2010 Annual Report retrieved from icsid.wordlbank.org 223 Goldman, Michael (2007), “How water for All!” policy beams hegemonic: The power of the World Bank and its transnational policy networks”, Geoforum 38(5): 786-800, retrieved from www.sciencedirect.com/science/article/pii/S0016718506001382 224 ICSID. (2015). ICSID Dispute Settlement Facilities. World Bank Group. Retrieved http://icsid.worldbank.org
58
other arbitral tribunal between investors and states under the UNCITRAL’s arbitration
regulations. It also provides administrative control for support for a number of
international dispute resolution proceedings under alternative facilities such as
“Permanent Court of Arbitration, The Hague, London Court of International Arbitration,
and International Chamber of Commerce in Paris”. As of 2015, the ICSID’s registered
cases are distributed across the following economic sectors. Oil, gas and mining (25%),
electricity and other energy (13%), other industries (12%), transportation industry (11%),
construction industry 7%), financial industry (7%),information industry and
communication industry (6%), water industry, sanitation and food protection (6%),
agriculture, fishing and forestry (5%), service and trade (4%) and tourism (4%) (ICSID,
2015)225.
1.16 UNITED NATIONS COMMISSION ON TRADE AND
DEVELOPMENT (UNCITRAL)
The United Nations Commission on International Trade Law is part of United
Nations (Known as “UNCITRAL”) established in the year 1966 with the purposes “to
promote the progressive harmonization and unification of international trade law”226.
UNCITRAL carries out its work at annual session held both in New York and Vienna.
The history of UNCITRAL is traced back to 1960s, when the world trade started to
expand, then there was felt the need for intentional rules and regulations to harmonize the
national or regional regulations, which was solely considered as a base for international
trade. The original memberships of UNCITRAL was 29 states, which was expanded to
36 in 1973, and to 60 in 2004. Members of UNCITRAL belongs to divergent legal
traditions and levels of economic development and geographic regions. Among these
states, 14 are African States, 14 are Asian states, and eight are Eastern European States.
The Entry into membership of Commission is made by General Assembly. Membership
is formed in such a way that it represents the worlds’ various geographic regions and its
225 See international Centre for Settlement of Investment Disputes, (2015) from http://icsid.worldbank.org 226 For details concerning the mandate for the progressive development of the law of international trade, see the report of the Secretary-General, Official Records of the General Assembly, Twenty-first Session, A/6396 (1966); the report of the Fifth Committee of the General Assembly at its twenty first session, Official Records of the General Assembly, Twenty-first Session, A/6594 (1966); and the relevant summary records of the proceedings of the Sixth Committee, which are contained in the Official Records of the General Assembly, Twenty-first Session, Sixth Committee, 947th-955th meetings (A/C.6/SR.947-955).
59
principal economic and legal system. The tenure for each member is six years, the terms
of held members expire every three years (The Wikipedia, Free Encyclopedia, 2015)227.
The Commission includes a Chairperson, three Vice Chairpersons and a Rapporteur. The
Bureau of the Commission is elected person of member states, which is elected at the
commencement of each annual session and continues his tenure until the beginning of
next annual session. Whereas, the Bureau comprised of representation from each five
regions228.
Since its establishment, UNCITRAL is recognized to be the core legal body of the
UN over International Trade Law. The basic work of UNCITRAL is harmonization and
modernization of rules of international trade. The harmonization and modernization of
law of international trade means to prepare legislative and non-legislative instruments in
a number of key areas of global commercial law. Those include, dispute resolution,
international contract practices, transport, insolvency, electronic commerce, international
payments, secured transactions, procurement and sale of goods. Each working group has
one or two sessions in each year. These sessions are also held alternatively between New
York and Vienna229. All international organizations other than members of the
Commission are allowed to attend the session as observer. The observers have same
rights of participation in discussion as the members states do230. The Commission has
established six working groups to prepare work on topics within program of work and is
also responsible for preparation of explanatory notes231. Each group has representation
from all member states of the Commission. The details are as under: -
227 United Nation Commission for Trade and Development. (2015, Dec 22). Retrieved https://en.wikipedia.org/wiki/ United_Nations _Commission_On_Interntional_Trade_Law 228 See para. 4 above and Official Records of the General Assembly, Twenty-third Session, Supplement No. 16 (A/7216) (1968), para. 14. 229 See the report of the Committee on Conferences (Official Records of the General Assembly, Thirty-fourth Session, Supplement No. 32 (A/34/32) (1979), para. 32 (e) (iii)). Prior to the relocation of the UNCITRAL secretariat from New York to Vienna, sessions of the Commission alternated between New York and Geneva (see General Assembly resolution 2205 (XXI), sect. II, para. 6; General Assembly resolution 31/140, sect. I, para. 4 (c); and General Assembly resolution 40/243, part one, para. 4 (c); see also General Assembly resolution 66/94, para. 20 230 For information on the participation of observers in UNCITRAL meetings, see Note by the Secretariat: UNCITRAL rules of procedure and methods of work (A/CN.9/638/Add.5), section IV. Status of observers; and Official Records of the General Assembly, Sixty-fifth session, Supplement No. 17 (A/65/17) (2010), Annex III: UNCITRAL Rules of procedure and methods of work 231 To date, explanatory notes have been prepared for the following texts: (a) United Nations Convention on the Carriage of Goods by Sea, (Hamburg, 1978) (A/CN.9/306); (b) United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980) (A/CN.9/307); (c) Convention on the Limitation Period in the International Sale of Goods (New York, 1974) (A/CN.9/308); (d) UNCITRAL Model Law on International Commercial Arbitration (1985) (A/CN.9/309); (e) United Nations Convention on International Bills of Exchange and International Promissory Notes (New York, 1988) (A/CN.9/386); (f) United Nations Convention on the Liability of Operators of Transport Terminals in International Trade (Vienna, 1991) (A/CN.9/385); (g) UNCITRAL Model Law on International Credit Transfers (1992) (A/CN.9/384); (h) United Nations Convention on Independent Guarantees and Stand-by Letters of Credit (New York, 1995) (A/CN.9/431); and (i) United Nations Convention on the Assignment of Receivables in International Trade (New York, 2001) (A/CN.9/557).
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1) “Working Group I--------Micro, Small and Medium sized Enterprises”
2) “Working Group II--------Arbitration and Conciliation”
3) “Working Group III--------Online Dispute Resolution”
4) “Working Group IV--------Electronic Commerce”
5) “Working Group V--------Insolvency Law232”
6) “Working Group VI--------Security Interests”
1. Working of United Nations Commission for International Trade Law
The methods of working at UNCITRAL are divided into three levels. First is
UNCITRAL/the Commission, which holds an annual plenary session. The second is
intergovernmental working groups (these groups work on UNCITRA’s work program).
These groups developed and designed the texts to simplify trade transactions. These
groups meet once or twice of year. The draft text then stands completed after consensus
of both member states and interested intentional and regional organization. The third
level is International Trade law Divisions of United Nations Office of Legal Affairs
provides conducting research and preparing studies and drafts facilities to UNCITRAL.
Third Division assists the other two in the preparation and conduct of their work233.
2. Functions of United Nations Commission for International Trade Law
As per their charters, the UNCITRAL is responsible for following functions
within third sphere of activities: -
i) “Encouraging cooperation between organization and coordinating their work”.
ii) “Promotion of Larger participation in existing international conventions and
wider recognition of existing and uniform laws”.
iii) “Preparation and promotion of new international convention, model laws and
promotion of codification thereof. Acceptance of international trade terms, in
232 In 2002, for example, Working Group V requested the Commission to, inter alia, approve in principle the draft of the legislative Guide on Insolvency Law (see Official Records of the General Assembly, Fifty-eighth Session, Supplement No. 17 (A/58/17) (2002), paras. 172-197). A similar approach was adopted in 2006 with respect to the recommendations of the Legislative Guide on Secured Transactions (see Official Records of the General Assembly, Sixty-first Session, and Supplement No. 17 (A/61/17) (2006), para.13). 233 See http://www.uncitral.org/uncitral/en/about/methods_documents.html
61
collaboration with the active organizations of their field”.
iv) “Promotion of ways and means of uniform interpretation and application of
international conventions and uniform laws in international trade”.
v) “Collection and distribution of information on national legislation and legal
development through case laws in international trade law.
vi) “Establishment and maintenance of a close collaboration with UN conference on
Trade and Development”.
vii) “Keeping liaison with other UN organs and specialized agencies with
International Trade”.
viii) “Taking any other action it may deem useful to fulfil its functions”234.
3. Conventions of United Nations Commission for International Trade Law
A convention is designed to amalgamate law by establishing binding legal
obligations. In order to become a party to a convention, states are required to deposit a
binding instrument of ratification with depository. The entry into a force of a convention
depends upon the deposit of a minimum number of instruments of ratification235. The
active conventions that were issued by UNCITRAL are as follows:-
1) “The Convention on the Limitation Period in the International Sale of Goods” (1974)
2) “The United Nations Convention on the Carriage of Goods by Sea” (1978)
3) “The United Nations Convention on Contracts for the International Sale of Goods”
(1980)
4) “The United Nations Convention on International Bills of Exchange and International
Promissory Notes” (1988)
234 General Assembly resolution 2205 (XXI), sect. II, para. 8 235 These minimum numbers are specified in the following articles: United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980), art. 99, para. 1; the Hamburg Rules, art. 30, para. 1; United Nations Convention on Independent Guarantees and Stand-by Letters of Credit (New York, 1995), art. 28, para. 1; United Nations Convention on the Assignment of Receivables in International Trade (New York, 2001), art. 45, para. 1; United Nations Convention on the Use of Electronic Communications in International Trade (New York, 2005), art. 23, para. 1; and the Rotterdam Rules, art. 94, para. 1.
62
5) “The United Nations Convention on the Liability of Operators of Transport
Terminals in International Trade” (1991)
6) “The United Nations Convention on Independent Guarantees and Stand-by Letters of
Credit” (1995)
7) “The United Nations Convention on the Assignment of Receivables in International
Trade” (2001)
8) “The United Nations Convention on the Use of Electronic Communications in
International Contracts” (2005)
9) “The United Nations Convention on Contracts for the International Carriage of
Goods Wholly or Partly by Sea” (2008)
10) “The United Nations Convention on Transparency in Treaty-based Investor-State
Arbitration” (2015)
4. Model Laws
The UNCITRAL also designed some model laws in the shape of legislative text and
is further recommended to member states for enactment as part of their national law.
These model laws are finalized and adopted by UBCITRAL in annual sessions. Recent
model laws that attained finality have been accompanied by a “guide to enactment”
containing background and other explanatory information to provide assistance to Govts.
and legislators as to how to use the text236. Some of model laws are as follows:-
1) “UNCITRAL Model Law on International Commercial Arbitration” (1985)
2) “Model Law on International Credit Transfers” (1992)
3) “UNCITRAL Model Law on Procurement of Goods, Construction and
236 The Model Laws on International Credit Transfers and International Commercial Arbitration include short explanatory notes prepared by the secretariat of UNCITRAL for information purposes. The Model Laws on Electronic Commerce; Electronic Signatures; Cross-Border Insolvency; International Commercial Conciliation and Public Procurement include more extensive, official guides to enactment. These guides were considered by the Commission and generally adopted together with the text of each model law.
63
Services” (1994)
4) “UNCITRAL Model Law on Electronic Commerce” (1996)
5) “UNCITRAL Model Law on Cross-Border Insolvency” (1997)
6) “UNCITRAL Model Law on Electronic Signatures” (2001)
7) “UNCITRAL Model Law on International Commercial Conciliation”(2002)
8) “Model Legislative Provisions on Privately Financed Infrastructure Projects”
(2003)
Apart from above model laws, the UNCITRAL also drafted following rules and
regulations: -
i) “UNCITRAL Arbitration Rules” (1976)-revised in August, 2010
ii) “UNCITRAL Conciliation Rules” (1980)
iii) “UNCITRAL Arbitration Rules” (1982)
iv) “UNCITRAL Notes on Organizing Arbitral Proceedings” (1996)
The updating system in UNCITRLA is very strong. They have developed a
System of Clout237 based on the court decisions and arbitral awards interpreting
UNCITRAL conventions238. The CLOUT system is updated on national correspondents
contributed either by States parties to a convention or by States which have enacted
legislation based on a model law of UNCITRAL239. The working groups of the
UNCITRAL also issues legislative guidelines, which are aimed to provide the detailed
analysis of the issues and their resolution in the local context. Once developed, it would
be finalized in the annual session of UNCITRAL. The UNCITRAL has so far adopted the
237 Prior to 2000, cases on the New York Convention were collected and reported in the yearbooks of the International Council for Commercial Arbitration (see http://www.arbitration-icca.org). Additional cases can be found at http://www.newyorkconve ntion1958.org 238 See Official Records of the General Assembly, Forty-third Session, Supplement No. 17 (A/43/17) (1988); and the note by the Secretariat entitled “Collection and dissemination of information on UNCITRAL legal texts” (A/CN.9/312). 239 See Official Records of the General Assembly, Forty-third Session, Supplement No. 17 (A/43/17) (1988), para. 100. Since the twenty-second session of the Commission (1989), meetings of national correspondents are usually held in Vienna in conjunction with alternate annual sessions of the Commission. In 2009, the Commission agreed that national correspondents be appointed for a period of 5 years to ensure that the collection system was sustainable over time and could respond to changing circumstances (Official Records of the General Assembly, Sixty-fourth Session, Supplement No. 17 (A/64/17) (2009), para. 370.
64
following legislative guides:
• “UNCITRAL Legislative Guide on Privately Financed Infrastructure Projects”
(2000)
• “UNCITRAL Legislative Guide on Insolvency Law” (2004)
• “UNCITRAL Legislative Guide on Secured Transactions” (2007)
• “UNCITRAL Legislative Guide on Secured Transactions: Supplement on Security
Rights in Intellectual Property” (2010)
1.17 INTERNATIONAL CHAMBER OF COMMERCE
International Chamber of Commerce is one of premier largest representative trade
body of the world. Their members includes member companies over 180 states and
almost every sector of private corporations. ICC has three main functions, 1)”rule
making”, 2) “dispute resolution”, and 3) “policy advocacy”. As their members are
themselves participates of international business, therefore, ICC has unmatched authority
in rule making that governs, facilitate and conduct business across borders. Though, these
rules are voluntary, but they are observed in every day of international business
transaction, thus becomes an integral part of international trade. Its national committee
scattered over 90 countries set business priorities at national or regional level. More than
2,000 business experts from members companies are contributing into designing ICC
stance on any specific business issues. ICC also keep liaison with UN and WTO and
many other inter-governmental bodies at regional and international level. With the views
of international business. ICC was first organization that granted “general consultative
status with the United Nations Economic and Social Council”. The history of ICC is
traced back to 1999, when the need was felt to serve world business for promotion of
investment and trade, open markets for goods and facilitate free flow of capital. Its
intentional secretariat was established in Paris and “International Court of Arbitrations”
was created in 1923.
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1. Membership
There are two ways to have membership of ICC.i.e. 1) Through affiliates with an ICC
national Committee or group, and 2) By direct membership with the ICC intentional
Secretariat when a national Committee/group has not yet been established (ICC, 2016)240.
2. Governing Bodies of ICC
a) World Council
It is supreme body of ICC comprising of representatives of National Committee. They
elect the top highest officials of ICC, like the Chairman and the Vice Chairman. Both of
them can serve a two years terms. The Chairman, Vice Chairman and the honorary
Chairman are good leaders providing high level world leadership. They have an
important role in ICC’s section.
b) Executive Boards
Executive Board is responsible for strategic direction for ICC. It consists of 30 business
leaders and ex-officio members. They are elected by the World Council on the
recommendations of Chairmanship. The Executive Board can meet three times a year and
is also responsible for overseeing the establishment of ICC’s strategic priorities and
implementation of its policies.
c) International Secretariat
ICC’s international secretariat is located in Paris and is the operational part of ICC. It
designs and carries out ICC’s work program, feeding business views into
intergovernmental organization and issues that directly have influence on business
operations. It is led by Secretary General, who is also appointed by the World Council.
d) National Committees
In 92 of total world Nations, members have established formal ICC structures called
240 International Chamber of Commerce. (2016, Jan 1). How to join ICC?. Retrieved http://www.iccwbo.org/id19698/iindex.htm
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national Committees. In countries, where there is no national committee, companies and
organization such as chambers of commerce and professional association can become
direct members.
e) Finance Committees
It is responsible for advisory services to the Executive Board on all financial matters. It
prepares the budget and regulatory reports on behalf of the Executive Board. It revives
the financial implications of ICC activities and supervises the low of revenues and
expenses of the organization.
3. Dispute Resolution at ICC
The dispute resolution mechanism at ICC is to solve difficulties in international business.
ICC arbitration is a private procedure that have binding effect on their subject. Their
decisions are enforceable. The International Court of Arbitration of ICC supervise ICC
Arbitration. It has so far received at about 20,000 cases since its beginning in 1923 (ICC,
2005)241. With passage of time, the ICC membership increased and at the present 85
countries and territories are members of ICC. It has representatives in Central American,
Latin America, North America, Asia, Middle East and Africa. Their training activities are
used in all major languages in international trade in all continents. ICC dispute resolution
has mechanism has following characteristics:-
a. “Arbitration at ICC is flexible and efficient dispute resolution procedure followed
by binding and final decisions subject to enforcement worldwide.
b. “Mediation is flexible techniques conducted privately and confidentiality, in
which a neutral facilitator helps parties to seek a negotiated settlement of their
dispute”.
c. “Dispute boards are independent bodies designed to help resolve disagreement
arising during the course of a contract”.
241 ICC. (2005). Rules of Arbitration and Rules for a Pre-trial Referee Procedure., France, P.7
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d. “Expertise is a way of finding the right person to make an independent assessment
on any subject relevant to business operations”.
e. “Docdex provides expert decisions to resolve disputes related to documentary
credits, collections and demand guarantees, incorporating ICC banking rules”.
4. Best practices of rulemaking, policies and business
ICC rule making, policies and standards are prepared by specialized working
bodies. In normal procedure, policy statements are first adopted by the commission, in
consultation with national committees and then approved by the Executive Board, before
regarding as official and public ICC positions. The commission also scrutinize major
policies issue relating to world business. Each national committees (NC) or group may
send their representatives at its meetings. Office bearers are appointed by Chairman and
Secretary General in consultation with NCs. The Commission convenes its meeting two
times a year. There are some task force constituted under various commission to
undertake specific projects and report back to their parent commission (ICC, 2016)242.
In September, 2011, ICC revised rules for Advertising and Marketing
Communication practice with a dedicated website, www.codescentre.com, to provide
guidance to advertising and marketing professionals around the globe. This code was
aimed at smoothening the ethical standards and guidelines for business using changing
technologies, tools and techniques to market products and service. It is developed by
experts representing all sectors of industry and regions of the world. The purpose of code
it to protect consumers under the guidelines for marketing. The code comprises of two
main sections. General Provisions and Chapters. The General Provisions section contains
fundamental principles and other broad concepts applicable to all marketing in all media.
The code targets specific marketing areas, such as Sales promotion, sponsorship, direct
marketing, Digital Media and Environmental Marketing claims (ICC, 2016)243.
242 ICC. (2016). ICC Policies and Rules. Retrieved www.iccwbo.org/advocacy-codes-and-rules/areas-of-work/ 243 ICC. (2016, Jan 01)). Codes Centre. Retrieved www.codescentre.com
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5. World Chambers Federation
In 1956, ICC established World Chambers Federation. Formerly, it was known as
International Bureau of Chambers of Commerce. It has networks of 12,000 chambers of
commerce and industry around the world244. The purpose of WCF is to provide best
practices to global products and chambers and to provide level playing field for
intentional partnership, between chambers and other stakeholders to help govern
business. WCF is non-governmental and nonpolitical organization sand its membership
includes local, regional, national, bilateral and transactional chambers of commerce, as
well as private law and public law chambers.
In 1950, in Rome, World Congress of Chambers of Commerce unanimously
adopted the resolution for establishment of WCF. Initially, it was named as “International
Information Bureau of Chambers of Commerce”. Due to its expansion in 1960, it was
named as “International Bureau of Chambers of Commerce and in 2001 it was named as
World Chambers Federation, over the period of 60 years, the presence of WCF is almost
in every country around the world. The features of WCF is outlined as under:-
i) “Multi sector organizations that accept members without sectorial
restrictions”.
ii) “Non-pursuing political goals (i.e. they advocate for business and promote
legislation that is advantageous to business.)
iii) Facilitating the role of chambers of commerce as local business support
agencies.
iv) Administering the international guarantee claims of ATA Carnets, the customs
document allowing the duty free and tax free temporary import of goods.
v) “Improving the capacity of chambers in issuing certificate of origin, including
the management of an international commerce chain”
vi) “World Chambers Network-a website platform with services including a
Global Chamber directory, Business Opportunities Promotion Service
Chamber Trust Business Accreditation Program”
244 World Chambers Federation. (2015, Jan 01). Retrieved www.iccwbog.org/about-icc/organization/wordl-chambers.federation/
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vii) “Chamber Professional and Institutional development services.
WCF also arranges world congress every two years in different region of world.
The congress is the only international forum for chamber leaders and professionals to
share best practices, ideas, exchange insight, develop networks and learn about new areas
of innovation from Chambers around the world. The Federation also announces the
winners of world chambers competition in recognition of most innovative projects
undertaken by chambers of commerce and industry from around the world. The WCF
also organizes different events relating to training in the shape of local conference for
small groups. These small courses shares ICC’s expertise on commercial arbitration and
dispute resolution mechanism, ICC’s trade rules, uniform customs and practice for
documentary credits (UCP) and international contracts.
6. ICC Special Projects and initiatives
a) ICC Publications
At ICC publications, the latest up-to-date information over rules, codes and other
general information are published from to time. These include three categories: ICC rules
and guidelines, practical commentaries, and references works. ICC publications include
work and deliberations of ICC commissions, institutions and individual international
experts. ICC publishes for international lawyers, arbitrators, bankers, traders and
students. Their topics cover vast areas of intentional business, i.e. international banking,
intentional trade reference and terms, law and arbitration, counterfeiting and fraud and
models commercial contracts. The best publications of ICC are “Uniform Customs and
Practice for Documentary Credits and “Incoterms” have been translated into more than
30 foreign languages.
b) ICC Commercial Crime services
This department of ICC provides global business community with a centralized
commercial crime. Fighting body. It interconnect worldwide resources of its members in
the fight against commercial crime one many frontiers. It is located in London and have
three separate bureau. The ICC (CCS) operates on two lines, 1) to prevent commercial
70
crime, 2) to investigate and help prosecute criminals involved in commercial crime. The
following are specialized divisions of ICC (CCS): -
1) Intentional Maritime Bureau
2) Financial Investigation Bureau
3) Counterfeiting Intelligence Bureau
4) FraudNet
c) Role in combating counterfeiting and piracy
ICC has established Business Action to stop counterfeiting and Piracy (BASCAP)
to tackle ever growing counterfeiting and Piracy in global business. BASCAP coordinates
with world business community to identify and address intellectual property rights issues
and liase with local, national and intentional officials in the enforcement and protection
of IPR. The agenda of BASCAP is to: -
1) Increase both awareness and understanding of counterfeiting and piracy
activities and the associated economic and social harm.
2) Compel govt. action and the allocation of resources towards improved IPR
enforcement.
3) Create a culture change to ensure intellectual property is respected and
protected (ICC, 2016)245.
d) ICC Business World Trade Agenda
Recently, in 2012, ICC launched ICC business world Trade Agenda with the
partnership with Qatar Chamber. The purposes of this Agenda to provide private sector
leadership in molding new multinational trade policy agenda. The move was significance
as to help WTO multilateral trade talks that were stalled for last 11 years deadlock. This
Agenda is strong business initiative to bolster rules-based trade. The aims of World trade
agenda are.
1) Define multilateral trade negotiation priorities for business.
245 ICC. (2016, Jan 6). Retrieved www.icc.org/advocacy-codes-and-rules/basis/
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2) Help govts. to set a trade policy agenda for 21st century that contributes to
economic growth and job creations.
3) Find answers to the current economic crises and drive more effective trade talks.
4) Set concrete recommendations to advance global trade negotiations.
5) Sound the alarm on protectionism.
6) Gather input and validation from global business community on trade agenda
priorities and recommendations for achieving a Doha victory.
The Agenda also contributed towards adoption of first ever Trade Facilitation at
WTO’s 9th Ministerial conference on 7th December, 2013 (ICC, 2016)246. The ICC since
1946 also held two top level consultations with the UN and has ever since close working
relationship with its specialized agencies.
e) ICC Research Foundation
This foundation was established by ICC in 2009 to carry out independence research
intended to contribute public knowledge, education and debate on the benefits of global
trade and investment. The aims of ICC RF is as under: -
i) Demonstrate how employment and growth flow from an expansion of
International Trade and Investment.
ii) Establish that a multinational approach that is beneficial to that end.
iii) Document how protectionism works against the public interest by finishing
employment, sustainable growth and the market economy.
iv) Promote a deeper understanding by policy makers, the media and the public at
large of the benefits of global trade and investment.
246 ICC. (2016, Jan 04). World Trade Agenda Initiative. Retrieved www.iccwbo.org/global-influence/world-trade-agenda
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CHAPTER 2
FOREIGN INVESTMENT LAWS AND PROCEDURE OF
PAKISTAN
2.1 INTRODUCTION
Pakistan is strategically located in South Asia with a unique demograph. Its
income category is lower middle income. With the economy of 200 million people and
60 million middle class consumers, Pakistan is ideally emerging as next investment
destination with its untapped resources of trainable force and rising domestic
consumption but due to lack of capital investment this dream cannot be realized. Though,
Pakistani regulatory investment environment is competitive and most friendly in the
world. Unlike India and other emerging economies, Pakistan has no restrictions on
foreign ownership, foreign exchange conversions profits’ repatriations and expatriates’
hiring is permissible in Pakistan. Pakistan also has the lowest corporate taxes and offers
tax incentives for strategic investments (Khan, 2015)1.
Under the present scheme of Pakistani laws on foreign investment, foreign
investors are allowed to hold 100% ownership in industrial projects. Govt. cannot impose
sanctions on setting up any industry relating to any field of business, location and size
except for the following prohibited areas:-
1) Arms and Ammunitions
2) High Explosives
3) Radio Active substances
4) Security Printing, currency and mint
As per new investment policy, in Pakistan being Islamic state, no new activity
relating to manufacturing of alcoholic drinks and beverages are allowed to be carried out
in any part of Pakistan. The investors are ought not to seek any kind of approval for
setting up a foreign project except for the negative areas. The foreign investments are
1 Khan, M. (2015, Nov 1). Investing in Pakistan. Daily Dawn.
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allowed on repatriable basis in agriculture, infrastructure, service and social sectors. Only
requirement is registration of a company with the Securities Exchange Commission of
Pakistan under the Companies Ordinance, 1984 and the information to State Bank of
Pakistan (Nima, 2016)2.
Investment in deregulated services sector are also allowed in Pakistan subject to
prior permission/NOC or license from concerned agencies and respective sectorial
policies. Some of the deregulated services in telecommunications are Email/Internet/
Electronic Information Services (EIS) and Data Communication Network Services, etc.
The above deregulated services are permissible in collaboration with the national
company for telecommunication i.e. Pakistan Telecommunication Ltd. Investment policy
of 1997 is catalyst in Pakistani investment and is considered to be primary source for a
present liberal investment regime in terms of investors facilitation and sectors of
investment. The investment regime of 1997 was further broadened through investment
policy, 2013 announced by Federal govt. The said policy permits investment in all sectors
of the economy unless specifically and categorically prohibited for want of public safety
and national security. The Investment Policy, 2013 does not specify the minimum
requirement of amount of foreign equity investment in any sector. Foreign investors are
granted the same status as that of local and domestic investors, and they are entitled to all
other facilities available to local and domestic investors on equal basis. There is also no
restriction on the upper limit on the share of foreign equity except few sectors, like
airlines, agriculture, banking and media (Goldman,2013)3.
2.2. FORIEGN INVESTMENTS LAWS ENFORCED IN PAKISTAN
Regulatory framework for foreign investment in Pakistan provides for protection
to foreign investments by following acts of parliament (KPMG Taseer Hadi & Co., 16)4
or legislation:-
2 Nima H. (2016, January 1). Foreign Investment Laws in Pakistan. Retrieved From Pakistani Lawyers website www.pakistanilawyers.com/articles/foreing-investment-laws-in-Pakistan-561 3 Goldman. C. S.(Ed.). (2013). The Foreign Investment Regulation Review. Chapter 17, Pakistan, pp 224. London. Law Business Research Ltd. 4 KPMG Taseer Hadi & Co. (2016, August 30). Investment in Pakistan. Retrieved from KPMG Taseer Hadi & Co website: http://www.kpmg.com/PK/en/IssuesAndInsights/ArticlesPublications/Documents/Investment-in-Pakistan2013.pdf
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1) Foreign Private Investment (Promotion and & Protection) Act, 1976 2) The Protection to Economic Reforms Act, 1992 3) Board of Investment Ordinance, 2002
4) Arbitration (International Investment Disputes) Act, 2011
5) Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral
Awards) Act, 2011
6) The Special Economic Zones Act, 2012
7) Investment Policy, 1997
8) Investment Policy, 2013
9) Bilateral Investment Treaties of Pakistan
Foreign investment in Pakistan is also regulated by Foreign Exchange Regulation
Act, 1947 (Goldman, 2013)5. The remittance arising out of foreign investment are treated
repatriates subject to rules and regulations of State Bank of Pakistan. However, with
certain modification, these rules are relaxed under the first two enactment. The Govt. of
Pakistan has signed Bilateral Investment Treaties with 47 countries and Avoidance of
Double Taxation Treaties with 53 countries. In the year 2013, the Federal Govt. in order
to facilitate and to liberalize foreign investment has also issued Foreign Investment
Policy, 2013 (Board of investment, 2015)6. There are some of the investment disputes
also under the BITs of Pakistan, which were concluded by ICSID (ICSID, 2015)7, the
International Agency of World Bank for providing the services of Arbitration in disputes
relating to international investment. It is an international investment arbitration platform
that facilitates disputes resolution and conciliation between international investors and
states8.
5Goldman. C. S.(Ed.). (2013). The Foreign Investment Regulation Review. Chapter 17, Pakistan, pp 224. London. Law Business Research Ltd. 6Board of Investment. (2015, May 09). Investment Policy, 2013. Retrieved from Board of Investment website: http://www.boi. gov.pk/UploadedDocs/Downloads/InvestmentGuide.pdf 7ICSID, (2015, May 09). List of Cases. Retrieved from International Center of Settlement of investment Disputes website: https://icsid.worldbank.org/apps/ICSIDWEB/cases/Pages/AdvancedSearch.aspx?rntly=ST105 8The Wikipedia, Free Encyclopedia. (2015 May 09). International Center of Settlement of investment Disputes. Retrieved from The Wikipedia website: http://en.wikipedia.org/wiki/International_Centre_for_Settlement_of_Investment_Disputes
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1 Foreign Private Investment (Promotion and Protection) Act, 1976
Foreign Private Investment (Promotion and & Protection) Act, 1976 (Board of
Investment, 2015)9 is a special law promulgated by an act of Parliament in the year 1976 to
give legal cover to international investor and their investment in Pakistan (Tahir, 2015)10.
Primarily this enactment was promulgated for promotion and protection to foreign
investment in Pakistan. It has given the legal cover to all industrial undertaking established
after first of September, 1954, if they have prior approval from the Govt. of Pakistan. The
provisions of the act are applicable on all industrial undertaking or setup thereof. The
protection in the Act are available to foreign investment in addition to protection available to
foreign investment under bilateral investment treaty. It has total eleven section. The section 3
of the Act provides for field for foreign investment on which the discretion was given to the
Federal Govt. to open any sector of economy for foreign private investment11. The dissection
of this section reveals that the discretions are exercisable by the Govt. keeping in view special
areas of interest relating to economy. These include investment relating to economic and
social needs of the country, which could also contribute to resources of Pakistan. The
investment having option to strengthen the balance of payments and discovery, mobilization
or better utilization of natural resources. Section 4 provides for approval of Foreign Private
Investment from the govt. of Pakistan. The most important section of the enactment are
section 5, 6 and 7. These relate to protection of foreign private investment agreements12 and
repatriation facilities to the country from where it was originated. Amongst other, these are
sub-divided into three categories i) original investment, ii) profits on original investment, and
iii) additional amount resulting from the re-invested profits13. The remittance earned by
foreign employees national working in any industrial undertaking in Pakistan and their
repatriation are subject to rules and regulations or orders by Federal Govt. and State Bank of
Pakistan14.
9Board of Investment. (2015, May 11). Foreign Private Investment (Promotion and Protection) Act, 1976. Retrieved Board of Investment website: http://boi.gov.pk/UploadedDocs/Downloads/InvestementActs.pdf 10Tahir. A. (2015, May 09). Developing Countries International Investment Policies, Unveiling Pakistan Paradoxies. Retrieved on from http://works.bepress.com/alishba_tahir/1 11 See section 3 of the Act. 12 See section 5 of the Act 13 See section 6 of the Act 14 See section 7 of the Act
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2 The Protection to Economic Reforms Act, 1992
The Protection to Economic Reforms Act, 1992 (Board of Investment, 2015)15 was
also enacted by Govt. of Pakistan as an act of parliament as an aid in protection to
economic reforms carried out in the late 199016. The economic as per the Act includes all
economics policies, laws, programs, regulations, announced, promulgated or
implemented and privatization of public sector enterprise17. This act has scattered over 11
sections. Section 4 provides for freedom to bring, hold and sell and take out Foreign
Currency without Foreign Currency Declaration at any stage by foreign investor was
made permissible18. Likewise, section 5 of the Act talks about foreign currency account
that are immune from Income Tax authorities and taxation authority. These account are
also exempted from levy of wealth tax and compulsorily deduction of Zakat. The State
Bank of Pakistan was also restricted through section 5(2) from imposing any restrictions
on these account on deposits and withdrawal19. Section 6 and 7 provides for protection of
fiscal incentives for setting industries and transfer of ownership to private sectors. Any
incentives and enterprise transferred by Govt. to any person cannot be compulsorily
acquired or taken over by Govt. which shows substantial protection and coherence to
policies and rules of investment are provided in Pakistan. No enterprise was compulsorily
acquirable by Govt. of Pakistan belonging to foreign and Pakistani national20. All
banking transaction by all banks and Financial Institutions regarding foreign currency
accounts of foreign investment ought to be done21. Section 10 says that all financial
obligation incurred by previous govt. under any instruments, the same shall continue to
be in force and shall not be altered.
3 Board of Investment Ordinance, 2002
Board of Investment is autonomous body established by an act of parliament as an
apex agency to encourage both local and foreign investment (Board of Investment,
15Board of Investment. (2015, May 11). The Protection to Economic Reforms Act, 1992. Retrieved from Board of Investment website: http://boi.gov.pk/UploadedDocs/Downloads/InvestementActs.pdf 16 See preamble of the Act 17 See section 2(b), which provides for economic reforms 18 See section 4 of the Act, 19 See section 5 of the Act 20 See section 8, 9 of the Act 21 See section 9 of the Act
77
2015)22. The primarily function of the body is to attract, facilitate and to promote foreign
investment in Pakistan. It tried to serve one-window interface for foreign and national
investors in all sectors of economy (Board of Investment, 2015)23. Originally, this body
was established as Pakistan Investment Board and was headed by the Prime Minster of
Pakistan as President of Board. It was lateron, merged into as an attached department of
Ministry of Industries and Production in 1996, thereafter, in the year 2003, it was
transferred to Ministry of Privatization and Investment. In 2008, the BoI became a
division in the Ministry of Investment in 2003 (The Wikipedia, 2015)24. In the year 2009,
due to re-organization and abolishing of Ministry of investment, the same placed under
the Prime Minister’s Secretariat. The BoI is also active member of World Association of
Investment Promotion Agencies (WAIPA, 2015)25.
The main objective of BoI is to support long term and sustainable economic
growth through friendly investment in Pakistan. It also provides investment related
services, promotion material and highlighting different sectors of Pakistan, which are
lucrative for investors. BoI has a major role to play in stimulating the investment. It also
serves as apex body to give advices to different agencies regarding investment and
liaising with other international investment promotion agencies. Unlike, previous decade,
the BoI has attracted US$ 21 billion in foreign investment in this decade, whereas in
previous decade, the BoI attracted Rs.3 billion.
4 Arbitration (International Investment Disputes) Act, 2011
Arbitration (International Investment Disputes) Act, 2011 is national legislation
enacted by Govt. of Pakistan of implementing international convention of International
Center for Settlement of Investment Disputes (National Assembly of Pakistan, 2015)26.
The schedule of the act carries the International Convention for establishment of Center
22Board of Investment. (2015, May 11). Board of Investment Ordinance 2001. Retrieved from Board of investment website: http://boi.gov.pk/AboutUs/BOIOrdinance.aspx 23Board of Investment. (2015, May 11). About Board of Investment of Pakistan. Retrieved from Board of Investment website: http://boi.gov.pk/AboutUs/AboutUs.aspx 24The Wikipedia, Free Encyclopedia. (2015 May 09). Pakistan Board of Investment. Retrieved from The Wikipedia website: http://en.wikipedia.org/wiki/Pakistan_Board_of_Investment 25World Association of Investment Promotion Agencies (WAIPA). (2015, May 15). Retrieved from World Association of Investment Promotion Agencies (WAIPA) website: http://waipa.org/ 26National Assembly of Pakistan. (2015, May 12). Arbitration (International Investment Disputes) Act, 2011. Retrieved from National Assembly of Pakistan website http://www.na.gov.pk/uploads/documents/1304997073_250.pdf
78
for Settlement of Investment Disputes27, the prime body of resolution of disputes relating
to international investments. The move of enacting the national legislation was with the
purpose of restoring the confidence of international investor in Pakistan. This much
awaited legislation was being looked over by many peoples in wake of decision of
Supreme Court of Pakistan in the case of SGS versus Pakistan (Supreme Court Monthly
Review, 2002)28, whereby it was observed that although Pakistan is signatory to the
Convention, but the same was not made part of national legislation, therefore, it was
observed that the Pakistani Courts are not bound to stay the proceedings initiated in their
court following commencement of ICSID Arbitration. The international proponent argues
that such enactment is good sign as now the enforcement of ICSID award in Pakistani
court is easier as compared to many other states, where awards are left to the civil
procedural provisions. Previously, the ICSID convention was promulgated through an
ordinance in the year 2007, but due to constitutional changes in Pakistan, the same lived
for 120 days. Lateron, the Supreme Court of Pakistan revalidated all acts, legislation and
orders in the famous case of Tikka Khan (Pakistan Legal Decisions, 2007)29, which
judgment gave impetus to the legislation for further two years till the year 2009, where
deposed judges of Supreme Court after re-taking the charge ordered that all previously
legislation in the era of Musharraf ought to be re-validated from Parliament30. President
Zardari after the judgment, two times promulgated the legislation through Ordinances,
but finally, it was made an act of Parliament in the year 2011.
The section 3 of the Act defines registration of award, which is deemed to have
been rendered by ICSID. For the purposes of execution, the award shall be treated a
judgment of High court. The Exemption to the Govt. is provided under section 5 of the
Act, where any award in which the Govt. was not party, cannot be enforced against the
Govt31. The exclusiveness of the Act can be observed from the fact that the local version
of Arbitration Act, 1940 is done away and their provisions are not applicable on the
proceedings of the Act32. The Act further provides Article 18, 19, 20, 21(a) and 22 as
27 See Schedule of the Act, which is incorporated in the Act verbatim. 28 See, Societe General Surveillance versus Pakistan, 2002 SCMR 1694. 29 See Tikka Iqbal Muhammad Khan versus General Pervez Mushararraf and others, reported as PLD Supreme Court, page 25 and 178 30 Ahmed Ghouri, (2013) Law and Practice of Foreign Arbitration and Enforcement of Foreign Arbitral in Pakistan 31 See section 3, 4 and 5 of the Act. 32 See section 6 of the Act
79
these are applicable to Article 21(a), 23(1), 24 shall have force of law. The schedule of
the Act carries with whole piece of ICSID Convention33.
5 Recognition and Enforcement (Arbitration Agreements and Foreign
Arbitral Awards) Act, 2011
Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral
Awards) Act, 2011 (National Assembly of Pakistan, 2015)34(hereinafter referred to as
“AAFA, 2011”) gives effect to Convention on the Recognition and Enforcement of
Foreign Arbitral Awards (New York Convention) 1958, commonly known as “New York
Convention”35. Previously, there was the Arbitration (Protocol and Convention) Act of
1937 to give legal cover to the Protocol on Arbitration Clauses and the Convention on the
Execution of Foreign Arbitral Awards (Geneva Convention) 1927, which however, was
repealed by latter enactment36. Under the scheme of AAFA, 2011, the High Court of
respective provinces of Pakistan has been given the powers to enforce and recognize the
foreign arbitral awards, whereas, any person can file a prescribed application under
section 6 of the Act37. This legislation primarily is based on the New York Convention.
On 10-06-1958, the Convention on Recognition and Enforcement of Foreign Arbitral
Awards was adopted by United Nations. This Act recognizes the international obligation
of Pakistan as per provisions of Convention. The provisions of Convention are made to
prevail than the provisions of act in case of any inconsistency38. Pakistan was one of the
first signatories of the New York Convention in 1958 but did not ratify it until 2005. A
temporary ordinance was promulgated that year to give effect to the Convention and was
periodically renewed by presidential ordinances. However, following the declaration of
emergency and the ensuing restoration of the deposed judiciary, the legislation expired in
August 2010. This Parliamentary enactment puts an end to much uncertainty surrounding
33 See Schedule to Act, which is reproduction of ICSID convention 34 The Act was published in the Official Gazette of Pakistan through ACT XVII of 2011 on 19-07-2011 and was to have force at once. The name of the legislation is provided in the section 1 of the Act and is known as Recognition and enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act 2011 and be accessed online at http://www.na.gov.pk/uploads/do cuments/13116647 67_452.pdf 35 See Preamble to the Act, which specifically provides for arbitration agreement and foreign arbitral award rendered under the New York Convention, 1958. 36 See section 10 of the Act 37 See section 6, where foreign arbitral award has to be recognized and enforced like judgment and order of the Court 38 See Second Recital of the act,, section 8 of the act provides for inconsistency between the provisions of Act and provisions of Convention, and in case of any inconsistency, the provisions of Convention would prevail
80
the enforcement of foreign arbitral agreements and awards in Pakistan and ensures that
the legal system in Pakistan is at least at par with similar enforcement regimes in the
international comity of nations (Nashat, 2015)39. Under the Act, in pursuance to Article II
of the Convention, an application to stay the legal proceeding pending arbitration
proceeding can be filed in the High Court as long as the arbitration proceedings are not
concluded40. Along with application for recognition and enforcement of Arbitral Awards,
as required in Article IV of Convention, the parties shall file documents in support of the
application41. It is interesting to note that under the scheme of this Act, no discretion has
been conferred upon the Pakistani courts even on the ground of inconvenience and has
even been observed by High Court of Sindh (Corporate Law Decisions, 2006)42.
6 The Special Economic Zones Act, 2012
Internationally, in order to bring technology and the investment, the country resort
to different Trade free zones commonly known as Special Economic Zones (SEZs).
These zones are established by host countries to foster business entities and free trade in
their national borders (The Wikipedia, 2015)43. In these zones, business and trade laws
are implemented differently from the rest of the country. They are located within the
countries’ national border. The purposes of establishing SEZs are increased trade and
investment, job creation and effective administration. In these areas, special policies
regarding investing, taxation, trading, quotas, customs and labor regulations are enforced
(Farole, T. Akinci, G., 2011).44. The creation of SEZs are meant to attract FDI (Woolfrey
Sean., 2013)45 in host countries, trade goods at more globally competitive prices
39Nashat. S. (2015, June 3). Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act, 2011. Retrieved from Counsel Pakistan website http://www.counselpakistan.com/vol-3/from_the_editors/by_shaharyar_nashat.php 40Section 3 of the Act provides for Jurisdiction of Courts, where any legal proceedings can be stayed pending Arbitration Proceedings in wake of Convention. 41See section 5 of the Act 42Travel Automation (Pvt.) Ltd v Abacus International (Pvt.) Ltd reported as 2006 CLD 497 43The Wikipedia, Free Encyclopedia. (2015, May 13). Special Economic Zones. Retrieved from The Wikipedia website: http://en. wikipedia.org/wiki/Special_economic_zone 44Farole, T. Akinci, G. (Ed.). (2011).Special Economic Zones Progress, Emerging Challenges, and Future Directions. Washington DC: The International Bank for Reconstruction and Development. Retrieved from World Bank website: https://openknowledge. worldbank.org/bitstream/handle/10986/2341/638440PUB0Exto00Box0361527B0PUBLIC0.pdf 45Woolfrey Sean. (2013).Special economic zones and regional integration in Africa. Tralac. Retrieved from Trade Law Center website: http://www.tralac.org/files/2013/07/S13WP102013-Woolfrey-Special-economic-zones-regional-integration-in-Africa-201307 10-fin.pdf
81
(Goldman Sachs)46. The SEZs historically were known as Free Zones and Enterpots for
centuries for free storage and exchange. Modern SEZs appeared from late 1950 in
industrial countries. First SEZ was in Shannon Airport in Clare, Irland. Recent trends in
SEZ were witnessed by African Countries with China (The Wikipedia, 2015)47. There are
multiples types of SEZs as practiced and established by host countries around the world.,
these includes i) Free Trade Zones (FTZ), ii) Export Processing Zones (EPZ), iii) Free
Zone/Free Economic Zones (FZ/FEZ), iv) Industrial Parks/Industrial Estate (IE), v) Free
Ports, vi) Bonded Logistics Parks (BLP), and vii) Urban Enterprise Zones.
Special Zones Framework in Pakistan is regulated by Special Zones Act, 2012
(National Assembly of Pakistan, 2015)48 and Special Zones Rules, 2013 (Pakistan Board
of Investment, 2015)49 notified in terms of section 40 of SEZ Act, 2012. These legislation
are incentive oriented legislation has been first time promulgated in Pakistan from
investment experiences of China to attract more confidence of the foreign investors in
investing its national border. China is helping Pakistan to develop RUBA SEZ. At
present there are following Special Economic Zones, planned in Pakistan in coloration
with different countries including China. These included i)RUBA SEZ, ii)China Pakistan
Economic Zone, iii) Japanese SEZ, iv) SEZ at Sialkot Lahore Motorway, v) Industrial
Estate in Faisalabad, vi)Karachi Export Processing Zone, Karachi, Sindh, vii) Risalpur
Export Processing Zone, viii) Sialkot Port Export Processing Zone, ix) Gujuranwala
Export Processing Zone and x) Khairpur Export Processing Zone (Pakistan Board of
Investment, 2015)50.
The important features of the SEZ Act are approval of Zones not less than fifty
acres51. Upto 30% of the Zone could be utilized for social infrastructure. The government
would ensure the provision of public utilities and transportation links upto the zero point
46Goldman Sachs says reforms to create 110 mn jobs for economy in 10 yrs. (2014, March 29). Business Today. Retrieved from Business Today website: http://businesstoday.intoday.in/story/goldman-sachs-says-reforms-to-create-110-mn-jobs-for-economy-in-10-yrs/1/204721.html 47The Wikipedia, Free Encyclopedia. (2015, May 13). Retrieved from The Wikipedia Website: http://en.wikipedia.org/wiki/ Special_economic_zone 48National Assembly of Pakistan. (2015, May 13). Special Economic Zone Act, 2012. Retrieved from National Assembly of Pakistan website: http://www.na.gov.pk/uploads/documents/1351075194_836.pdf 49Board of Investment. (2015, May 13). Special Zones Rules, 2013. Retrieved from Pakistan Board of Investment website: http://boi.gov.pk/UploadedDocs/Downloads/SEZ_RULES.pdf 50Board of Investment. (2015, May 13). Investment Guide. Retrieved from Pakistan Board of Investment website: http://boi.gov. pk/InvestmentGuide/SEZ.aspx 51See Section 16 of the Act
82
of the Zone. Furthermore, the government would promote simple administrative
procedures for SEZs with relevant Federal and Provincial authorities and agencies. These
includes issuance of licenses, permits and approvals, satisfactory customs and other
documentary requirements, easy fulfillment of tax or duties obligations, and the support
of govt. in authorization of modern means of communication and e-governance[52].
The labor laws of Pakistan would be equally applicable to the Zone Enterprises
too. Moreover, the Board of Investment has been conferred the power subject to
Approval after consultations with concerned Ministries and governmental agencies, to
issue special rules for employment of non-Pakistanis in key managerial and technical
positions53. These relate to issuance of visas, temporary residence permits, as well as
temporary work permits. Their dependents would be facilitated through these special
rules54. All these measures shows that the readiness and protection matters of foreign
investment by Govt. of Pakistan.
Each Zone shall be in the following categories which includes Free Trade Zone,
Export Processing Zone, Multilateral Economic Zone, Regional Development Zone,
Reconstruction Opportunity Zone, Hybrid Export Processing Zone, Sector Development
Zone, or Extra-Territorial Zone depending on specified characteristics55. An ETZ would
not fall under the ambit of the customs territory of Pakistan so that goods from these
areas and provision of services shall not be considered as export and import56. The
principles of rebates and other advantages are made applicable on these zones57. All
incentives under this Act are in furtherance and in addition to all incentives, benefits and
protections that may be applicable to Developers and/or Zone Enterprises under generally
applicable legislation and international agreements of Pakistan58. These benefits shall not
be withdrawn prematurely and any changes shall be to the advantage of the Developer or
52 See section 28 of the Act 53 See Section 31 of the Act 54 See Section 31 of the Act, in this section terms and conditions, visa requirement, temporary residence permit and temporary work permits are included. This section is comprehensive provisions, whereby discretion is given to BoI to frame rules to regard to expertise of non-Pakistani and their employment in these SEZs, 55 See section 2(i), in this act, kinds of Zones, which are into existence at the time of commencement of the Act and prior to this Act. This Act is equally applicable to all zones prior to coming into force of this Act. 56 See section 2(n) of the Act 57 See section 33 of the Act 58 See section 35 of the Act, which says protection of benefits available under generally applicable legislation
83
the Zone Enterprise59. One important feature of the SEZ Act, is that the Developers shall
be entitled to the following benefits60:
(a) One time exemption from all customs duties and taxes for all Capital Goods imported
into Pakistan for the development, operation and maintenance of a SEZ entity, subject
to verification and approval from Board of Investment.
(b) Exemption from all taxes on income accruable in relation to the development and
operation of the SEZ for a period of ten years, starting from date of signing of the
development agreement.
All Zone Enterprises shall be entitled to the following benefits61:
(a) Exemption from custom duties and taxes on imports of capital goods into the SEZ for
installation;
(b) Exemption from all taxes on income for a period of ten year starting from the date the
Developer certifies that the Zone Enterprise has commenced commercial operations
with the relevant SEZ.
A very relevant feature is the alternative dispute resolution clause. It would be
advisable to utilize the expertise available at Karachi Center for Dispute Resolution to
prepare an effective mechanism for a mediation process so that the investors and
developers can more concentrate towards the success of their endeavors. Pakistan is
geographically well-placed to be the ideal center for setting up industries to cater to the
Middle East, Central Asian Republics, and Afghanistan markets. The country also
welcomes import-substitution industries. The future benefits of the Act for Zone
Enterprises would be immediate savings in taxes, duties, and other front-loading charges,
a safe and secure working environment, preferential treatment of products and services
and, more importantly, accessible domestic and global markets (Aziz, 2012)62.
The BoI also felt that some existing custom duty related provisions and lack of
59 See section 35(2) of the Act 60 See section 36 of the Act 61 See section 37 of the Act 62Aziz, M. (2012, Nov 13). Special Economic Zone Act 2012 – Aiming for long term FDI. Retrieved from Majyd Aziz blogspot website:http://majydaziz.blogspot.com/2012/11/special-economic-zone-act-2012-aiming.html
84
monitoring thereof may lead to abuse of those incentives by unscrupulous elements.
Therefore, appropriate monitoring of the implementation by specialist agency i.e. Federal
Board of Revenue (FBR) would be required. Another proposal to limit any possible
distortions is to just give zone enterprises and developers only one time exemption for the
import of machinery and not to allow this exemption to continue indefinitely as
previously envisaged in the Act.
In pursuance to SEZ Act, 2012, under section 10 of the SEZ Act, 2012, the Govt.
of Sindh has established a Special Economic Zone Authority to carry out the purposes of
the act within province of Sindh and to safeguard the interest of investors. This Authority
being focal person would regulate and supervise the functions and provisions of
infrastructures to theses SEZs within the geographically boundaries of Province of Sindh
(Sindh Investment Board, 2015)63. BoI has proposed certain amendments in the
provisions of SEZ Act, 2012. These are deletion of wording of acres as appearing in
section 16(2)(a). The section 36(a) will be replaced as "exemption from all customs
duties and taxes for all capital equipment imported into Pakistan for the development,
operation and maintenance of a SEZ subject to verification by the FBR under the rules
made by the BoI”. The section 37(a) will be replaced with the wording "one time
exemption from customs duties and taxes on import of capital equipment into the SEZ for
installation in that zone enterprise subject to verification and approval of the FBR under
the rules made by the BoI. A new article will also be inserted as per sources of BoI in the
Act, which is as follows "if any difficulty arises in giving effect to any provision of this
Act, the BoI may, by notification in the official gazette, make such provisions as may
appear to be necessary for the purpose of removing such difficulty” (Ghuman, 2014)64.
7 Investment Policy 1997
Investment Policy, 1997 revolutionized a new dawn in Pakistan in respect of
international investment. This policy opened up services, social infrastructure and
agriculture sectors for foreign and local investors. The policy is believed to be major
63 Sind Investment Board. (2015, May 13). Special Economic Zone Authority. Retrieved from Sindh Investment Board website: http://www.sbi.gos.pk/seza.php 64 Ghuman. M. (2014, Aug 18). Special Economic Zones Act: Amendments likely to attract investors. Business Recorder. Retrieved from Business Recorder Website: http://www.brecorder.com/market-data/stocks-a-bonds/202:pakistan/1214381:special-economic-zones-act-amendments-likely-to-attract-investors/?date=2014-08-18
85
causes for integration of modern FDI into Pakistan. It exposed the Pakistan’s economy
into international market. Prior to this policy, foreign investment in Pakistan was
restricted to manufacturing sector only. Investment Policy of 1997 is one of the
fundamental foundation for the gains in FDI inflows over the subsequent decade (Tahir,
A. 2015)65. Some of the expert believed that it was incentive oriented policy (Khan, H, A,
1997)66. Following are some of the highlights (Bashar A. 2016)67 of this policy:-
i) Foreign investment on repatriable basis is allowed in Agriculture, Service/Infrastructure and Social sector.
ii) The import tariff on plant, machinery and Equipment was at the standard rate of 10% and no levy of Sales Tax.
iii) Foreign investment was allowed in Education, technical/Vocational Training and health and other areas.
iv) 40% equity to be held by Pakistan in company/project.
v) Foreign investment equity in the company or project should be at the level of
US$ 1 million.
vi) Sources of investment would not be probed by any agency.
vii) National Industrial Zones (NIZs) would be launched to promote export oriented units.
viii) Tariff rationalization of both provincial and Federal Level.
ix) At the time of policy, there were 24 different taxes, which were reduced to 5 in the policy.
x) Manufacturing sector has been prioritized into four categories.
a) Value added or export industries
b) High tech
65Tahir A. (2015, June 4). “Developing Countries International Investment Policies Unveiling Pakistan Paradoxes”. Retrieved from Academia Website: https://www.academia.edu/8315852/developing_countries_international_investment_policies_unveiling_pakis tan_paradoxes 66Khan, H. A. (Winter 1997). Foreign Direct Investment in Pakistan, Policies and Trends. The Pakistan Development Review 36:4, Part II. pp 959-985 67Bashar. A (2016 Jan 1). Investment Climate in Pakistan. Retrieved from Civil Service of Pakistan Forum website: http://www. cssforum.com.pk/css-compulsory-subjects/pakistan-affairs/3366-investment-climate-pakistan.html
86
c) Priority industries
d) Agro based industries
xi) Labor laws would be applicable as are applicable in Export Processing Zone
xii) Visa Policy was relaxed
xiii) To improve working relations, labor laws have been revised.
xiv) 100 billion was earmarked to upgrade existing roads and construction (Kahn.
H.A, 1997)68.
Successive governments in Pakistan have maintained these policies except a
temporary restriction imposed on foreign exchange accounts during 1998 when sanctions
were imposed on Pakistan after it exploded nuclear devices. These policies achieved the
desired result and FDI increased many fold in the coming years69.
8 Investment Policy 2013
After the Investment Policy, 1997, the Investment Policy, 2013 was enforced in
the year 2013 by the then Govt. of Pakistan with the purposes of taking advantage from
investment liberalization in the economic world for growth and prosperity (Sindh Board
of Investment, 2015)70. The investment Policy, 2013 is enhancement of Investment
Policy, 1997. It reinforced the components of old policy and is consolidation form of
existing policies of related line ministries. It is infact a liberalized policy. The revision of
existing policy 1997 has made through this policy because of global investment trends,
regional trends and experiences71. First time, FDI strategy for Pakistan for 2013-17 has
been set by the Govt. 72. Furthermore, the guiding principles have been inserted as
benchmark of attracting investment and theme of the policy. These included i) reducing
68Khan, H. A. (Winter 1997). Foreign Direct Investment in Pakistan, Policies and Trends. The Pakistan Development Review 36:4, Part II. pp 959-985 69Haque, S.Ghiasul. (2015, May 14). Impact of Foreign Direct Investment on Exports: A Case Study of Pakistan. Retrieved from Sarhad University of Science & Information Technology, University Town Peshawar, Pakistan website: http://www.iises.net/ download/Soubory/soubory-puvodni/Haq.pdf 70Sindh Board of Investment. (2015, May 16). Investment Policy, 2013. Retrieved from Sindh Board of Investment website: http://www.sbi.gos.pk/pdf/SEZA/INVESTMENT%20POLICY-2013.pdf 71See Clause 1.2 of the Policy: Evolutionary Enhancement of 1997 investment Policy 72See clause 1.3 of the Policy: Goals of the Policy
87
the cost of the business in Pakistan, ii) reducing the processes of doing business, iii) ease
of doing business with industrial clusters and SEZs and iv) linkage of trade, industries
and monetary policies for greater conveyance73. In nutshell, following features are
offered to investors for investment in Pakistan in Investment Policy, 2013:-
a) Equity caps by SBP and SECP have been removed;
b) One-window operation by BoI;
c) Establishment of SEZ has been emphasized, keeping the India’s SEZ example
as motivating factor;
d) SEZs Act, 2012 has been promulgated for industry clusterialization;
e) Planning Commission launched the Growth Framework;
f) Four areas productivity, better governance, competitive Markets, innovation
and entrepreneurship have been identified to closely intersect with Investment
Policy, 2013;
The Chapter II74 of the Policy emphasizes a liberal investment regime. The salient
features of liberal investment regime on the best practices are adopted in the Policy which
has been taken from the investment practices around the world. Some of few salient
features of liberal investment regime has been given in clause 2.1: -
1) Free entry for Foreign Investors (all sectors are included for investment-unless
specifically prohibited like, national security, public safety such as arms and
ammunitions, high explosives, radioactive substance, security, currency and
consumable oil.
2) No minimum requirement of foreign equity. Foreign investors shall be at
liberty to repatriate profits in the currency of origin of investment, subject
always to Act, 1976 and Foreign Exchange Manual.
73 See clause 1.4 of the policy Guiding Principles 74 See Chapter II of the Policy
88
3) Ease of registration and entry permit has been given in clause 2.2. All
corporate registration would be under Companies Ordinance, 1984. Foreign
investors and foreign investment companies are required to comply with the
compliance of two enactment i.e. Companies Ordinance, 1984 and
Competition Act, 2010.
4) Online registration of foreign investor by BoI entering or operating in
Pakistan, which serves as a notification to Govt. of Pakistan of presence of
foreign investor. Initial period of approvals are for the period of five years.
5) SBP and SECP has relaxed equity caps in this policy.
6) Foreign investor are entitled to lease the land without limitation.
7) Restriction on foreign real estate delivers have been removed.
8) Foreign investors are allowed to hold 60% stake in agriculture project.
9) In corporate farming, 100% equity are allowed.
10) The pioneer industry has extra advantages.
11) SMEs are given preferences.
12) Alternative and Renewable Energy is earmarked as one of the prime sector for
foreigner investors.
13) Alternative and Renewable Energy Board has been established for facilitation
of foreign investors.
In Chapter III75, investment protection is emphasized to be prime object of import
Policy, like a volatile law and order situation, investors’ rights are best protected. The
rights of investors which are given in the policy are fair and equitable treatment without
discrimination, right to due process of law as per Foreign Private Investment Promotion
and Protection Act, 1976 and Protection of Reforms Act, 1992. BoI intends to develop a
75 See chapter III of the Policy, 2013
89
model text with assistance of law and justice Division, which will ensure protection to
investment on reciprocity basis. The arrangement has also been made by Multilateral
Investment Guarantee Agency (MIGA) of World Bank for providing insurance to
investor’s projects in third world countries. The Arbitration (International Investment
Disputes) Act, 2011 enables the investors to go to higher courts. Recognition and
Enforcement of Arbitral Awards Act, 2011 has been also promulgated to safeguard the
rights of investors. The security from airport to airport to foreign investors to make them
feel like secured has been substantially included. The Intellectual Property Rights
Protection would be ensured by Govt. at any cost, for which separate window has been
established by BoI.
The Chapter IV76 provides for establishment of special economic Zones with aim
of reducing the cost of doing business. In this regard, Special Economic Zones Act, 2012
has been promulgated by the Govt. of Pakistan. The Chapter V77 of the policy talks about
facilitation to foreign investors such as comprehensive and investors’ friendly visa policy.
For Pakistan diaspora a dedicated cell has been established. Women entrepreneurs are
also encouraged in the policy. The Chapter VI78 gives the details of strategizing the
policy for implementation and development. Five years investment strategy has been
made, which would gradually be achieved. For implementation and development, seven
points including private and public sector dialogue has been provided in the policy.
2.3 INTERNATIONAL AGREEMENTS AND BILATERAL INVEST-
MENT TREATIES OF PAKISTAN
The most of Foreign Investment Laws of Pakistan are based upon the Bilateral
Investment Treaties as these contain provisions affecting rights and liabilities of
investors-state relationship. Bilateral Investment Treaties are an international agreement
governing terms and conditions of private investment by nationals and corporations of
one state with another. The investment of this kind is called FDI (The Wikipedia,
76 See chapter IV of the Policy, 2013 77 See chapter V of the Policy, 2013 78 See chapter VI of the Policy, 2013
90
2015)79. In nineteenth century, prior to BIT, there existed Friendship, Commerce and
Navigator Treaty (FCN) (Reisman Michael. W. et al., 2004)80. Most of the BITS of the
world provides for fair and equitable treatment, protection from expropriation, free
transfer of means and full protection and security of the investment. Important feature of
BIT is that they allow for a mechanism of alternative disputes resolution, whereby
investors in case of dispute between state and themselves so they could have recourse to
international arbitration under the auspices of ICSID (Wong, J. 2007)81. The First BIT of
the world was signed between Pakistan and Germany (Zampetti A. B and Pierre Sauve,
2007)82. Currently, there are 2500 BITs in force around the world between countries to
countries and between the investors and state (Dolzer. R. and Schreuer, C., 2008)83
(UNCTAD, 2006)84.
So far Pakistan has 48 Bilateral Investment Agreements with different countries
around the world (Pakistan Board of Investment, 2015)85. Out of which 26 are in force
(Pakistan Board of investment, 2015)86. But despite these long list of BITs, Pakistan has
failed to attract valuable FDI from the investors like China and India has done in South
Asia despite restriction on capital flow. In wake of these situation the Govt. official has
suggested model template of BIT, which would serve as basis for evolving the future
investment negotiations. The important aspect of model template is that they contain
arbitration clauses which provide for settling disputes in local courts than going into
international arbitration. This model was created by Pakistan in or around 2006 (Malik,
2010)87. Recently, the US-Pak BIT is under negotiation, but Pakistan is moving very
cautiously on this BIT after US has introduced a new draft that carries stringent clauses
79The Wikipedia, Free Encyclopedia. (2015, May 20). Bilateral Investment Treaties. Retrieved from The Wikipedia website: http://en.wikipedia.org/wiki/Bilateral_investment_treaty 80Reisman Michael. W. et al. (2004) International Law in Contemporary Perspective. Foundation Press p. 460 81Wong, J. (2007). Umbrella Clauses In Bilateral Investment Treaties: of Breaches of Contract, Treaty Violations, and the Divide Between Developing and Developed Countries In Foreign Investment Disputes. George Mason Law Review 14 Geo. Mason L. Rev. 135. 82Zampetti A. B and Pierre Sauve. (2007). International Investment. Research Handbook in International Economic Law (E. Elgar, 2007), p215; 83 Dolzer. R. and Schreuer, C.(2008). Principles of International Investment Law. London. Oxford 2. 84UNCTAD, World Investment Report (2006) XVII, 26 85Pakistan Board of investment. (2015, July 3). Bilateral Investment Treaties. Retrieved from Pakistan Board of Investment Website: http://boi.gov.pk/InvestmentGuide/BITs.aspx 86Pakistan Board of investment. (2015, July 3). Investment Guide. Retrieved from Pakistan Board of Investment Website:http:// boi.gov.pk/UploadedDocs/Downloads/InvestmentGuide.pdf 87 Malik, M. (2010) International Law Protections for Foreign Investment in Pakistan. Karachi. Overseas Investors Chamber of Commerce and Industry pp. 25
91
with far reaching implication (Rana, 2010)88. The existing International Investment
Treaty Model usually contain blanket provisions to cater to diverse relationship of state
with other potential capital exporting countries (Mahmood, 2013)89. The most of BITs
Pakistan has signed previously do not reflect mutually negotiated picture. They contain
provisions more suitable for investors and none for people of Pakistan. Due to deficiency,
Pakistan has now intends to change its BITs regime to streamline it in line with modern
investment law and best practices. In this regard, BOI has been conferred statutory
powers under clause 9 (m) (Functions of BOI) of BoI Ordinance, 2001 to negotiate and
finalize agreements for protection and promotion of investment with other countries.
Pakistan is one of the pioneer country, which first signed International agreement
with Federal Republic of Germany on 25th November, 1959 and it came into force on 28-
04-1962. The purpose of this agreement was to promote economic cooperation between
two states by allowing investments by national and companies of either state in the
territories of the other state. It is scattered over fourteen articles (Pakistan Board of
Investment, 2016)90. This BIT is one of the unique and first ever such agreement signed
by two countries after World War II. On its achieving golden jubilee, both countries in
order to promote and safeguard their interest and to expand their existing economic
relationship have singed new BIT superseding older one i.e. “The Agreement of the
Encouragement and Reciprocal Protection of Investment”. The Federal Republic
Germany is fourth largest trading partner of Pakistan. Under international trade, BITs are
known to provide protection to foreigner over their investment and to attract more
investment into domestic markets. However, in the case of Pakistan being heavily
dependent upon foreign investment, it has literally forgotten the implications of these
BITs would bring upon the fragile economy. In practice, BIT is divided into three
portions:-
88Rana S. (2014, March 16). US investment: Government to tread carefully on bilateral treaty. The Express Tribune. Retrieved from The express Tribune website: http://tribune.com.pk/story/683275/us-investment-government-to-tread-carefully-on-bilateral-treaty/ 89Mahmood N. (2013, July 15). Pakistan’s BIT dilemma. The Nation. Retrieved from the Nation website: http://nation.com.pk/ columns/15-Jul-2013/pakistan-s-bit-dilemma 90Pakistan Board of Investment. (2016, March 03). Investment Guide. Retrieved from Pakistan Board of Investment website: http://boi.gov.pk/investmentGuide/BITs.aspx
92
1) The scope of agreement
2) Substantive protections and treatment standards
3) Alternative Dispute Resolution
Pakistan is remarkably benefiting from BITs to improve their economy, but on the
other hand, ADR mechanism exposes it to international arbitration tribunal and incase of
ADR, local remedies are not an option, which in result burden the economy with the cost
of contesting the investors claim at the arbitration tribunal. The case study of Argentina is
2001-2002 is an eye opener, where sovereignty of Argentina was bitterly exposed and led
to domestic economic crises. At current, Pakistan has signed 46 BITs, given the current
investment climate, Pakistan has no other option but to rely on BITs in only alternative to
secure foreign investment91. In Pakistan, the policymakers are keen to attract more direct
foreign capital and 15 more BITs are under process with no evidence that previous at or
about 50 produce any desired results. Pakistan in Investment policy 2013 has adopted
new policy trends and even has introduced new draft template; which centers around
arbitration clauses. According to these model template, the specific period has been set
up for settlement of disputes prior to going to international arbitration (Khan, 2013)92.
The fragility of executed BITs by Pakistan so far can be observed that in the year
1996, Pakistani Govt. terminated the contract of SGS Societe General de Surveillance
(SGS) on the suspicion that it had been procured through bribe, which was denied and
objected over by SGS, whereafter, a series of legal proceedings in Switzerland and
Pakistan began, but all failed (Poulsen, 2016)93. To the surprise, after five years, ICSID
issued a letter calling upon the Pakistani Govt. to pay more than US$ 110 million in
compensation on the basis of BIT enforced between two countries despite the fact that the
dispute in the courts of both countries failed94. After the letter from ICSID, govt.
Officials came to know that how serious, the matter was as the commercial rights were
91“Bilateral treaties and Pakistan, by Zainab Mustafa; retreived07-03-2016 from http://e.thenews.com.pk/newsmag/mag/detail_a rticle.asp?magId=10&id=6865 92Khan, M.Zeb. (2013, Aug 26). Bilateral Investment Treaty model” by Mubarak Zeb Khan. Daily Dawn. Retrieved from Daily Dawn website: http://dawn.com/news/1038303 93Poulsen, Lauge N. Skovgaard. (2016, March 08). Sacrificing Sovereignty by Chance: Investment Treaties, Developing Countries, and Bounded Rationality. Thesis submitted to The London School of Economics and Political Science. Retrieved The London School of Economics website: http://etheses.lse.ac.uk/141/1/Poulsen_Sacrificing_sovereignty_by_chance.pdf 94SGS Societe Generale de Surveillance S.A. v Islamic Republic of Pakistan. ICSID Case No.ARB/01/13
93
involved for a wide range of regulatory conduct on the basis of vague treaty language,
which allowed the SGS to settle disputes with Pakistan Govt. outside Pakistan’s own
legal system i.e. approaching ICSID on arbitration forum (Poulsen and Dunbar, 2009)95.
It is estimated that Pakistan has faced claims worth US one billion dollars just because of
vague international investment treaties that are contrary to the interest of the country. All
of the BITs ratified and implemented are binding on Pakistan incase the foreign investors
were to file a claim against Pakistan. If the award is given against the govt. is not
implemented, the treaties allow the affected party to seize foreign assets of the country.
Most of these BITs are drafted in 1990, but Pakistan developed its own draft treaty in
2006. According to the Secretary of Board of Investment a careful balance has to be
taken while drafting policies and international agreements so that guarantees in these
agreement in no way infringe on the interest of the country’s development. Pakistan
lacked the capacity to pace up with the ever-changing international legal environment and
issues pertaining to security, energy, shortage and regulatory impediments, those are in
practice the causes of filing of claim by the investors (Bilateral Investment, 2010) 96.
Pakistan’s BITs have been signed by different govt. officials and representatives
and department officials over the years, therefore, there is a lack of control over the
procedure ad process of these BITs. BITs in past were signed rather as “ceremonial
gestures” coupled with unsophisticated negotiations, without knowledge of their
implication and when you are hit by the first investor states arbitration you realize what
these mean97. According to statistics of Board of Investment, US remains on the top of
five investors in Pakistan. Negotiations of BIT of Pakistan with US commenced in 2004.
Nevertheless, the US investors felt concerns about inadequate protection to American
investors in Pakistan especially in the wake of decisions of Supreme Court of Pakistan in
Siemens Westinghouse dispute98, in which Supreme Court did not enforce the arbitration
award in favor of the US investor99. The US-Pakistan BIT negotiations were conducted in
95 Poulsen and D.Vis-Dunbar. (2009, March 16). Reflections on Pakistan’s investment treaty program after 50 years- an interview with the former Attorney General of Pakistan, Makhdoom Ali Khan. Investment Treaty News. 96Bilateral Investment: Unfair treaties could drain national exchequer. (2010, Dec 24). The Express Tribune. Retrieved from website www.tribune.com.pk/story/93950/bilateral-investment-unfair-treaties-could-drain-national-exchequer/ 97Pakistan Attorney General Advises States to scrutinize Investment Treaties carefully, Investment Treaty News, 01-12-2007 98 Wak Orient Power and Light Limited versus Westinghouse Electric Corporation and others, 2002 SCMR 1954, Supreme Court of Pakistan. 99The Country Commercial Guide for Pakistan 2003 released by the US and Foreign Commercial Service and the US State Department described the Siemens Westinghouse case as: a longstanding investment dispute between a major US multinational and local partner over a contractual obligation has raised concerns about the sanctity of contractual intentional arbitration clause between private parties. Despite a clear
94
the wake of the four known BIT claims, which is facing suspension due to review by US
of its model BIT (Malik, 2010)100. The table below shows the list of Bilateral Investment
Treaties of Pakistan101
No. Partner Country Signing Date Date of Entry into
Force
1. Australia 07-02-1998 14-10-1998
2. Azerbaijan 09-10-1995 -
3. Bangladesh 24-10-1995 -
4. Belarus 22-01-1997 -
5.
BLEU
(Belgium Luxembourg
Economic Union
23-04-1998 -
6. Bosnia and Herzegovina 04-09-2001 14-05-2010
7. Bulgaria 12-02-2002 -
8. Cambodia 27-04-2004
9. China 12-02-1989 30-09-1990
10. Denmark 18-07-1996 25-09-1996
11. Egypt 16-04-2000 -
12. France 01-06-1983 14-12-1984
13. Germany 25-11-1959 28-04-1962
14. Germany 01-12-2009 -
15. Indonesia 80-03-1996 03-12-1996
16. Islamic Republic of Iran 08-11-1995 27-06-1998
ruling by the Intentional Chamber of Commerce in favor of the US investors a number of years ago, the local parties continue to actively litigate the matter in Pakistani courts. 100Malik, M. (2010). International Law Protection for Foreign Investment in Pakistan. Overseas Investors Chamber of Commerce and Industry. Karachi page 26. 101The table has been prepared using the data from the Board of Investment Website and UCTAD Investment Treaty database. Complete list of Bilateral Investment Treaties of Pakistan are available at the Board of Investment Official Website www.boi.gov.pk and can also be retrieved from www.investmentpolicyhub.unctad.org
95
17. Italy 19-07-1997 22-06-2001
18. Japan 10-03-1998 29-05-2002
19. Kazakhstan 08-12-2003 -
20. Korea Republic 25-05-1988 05-04-1990
21. Kuwait 17-03-1983 -
22. Kuwait 15-02-2011 -
23. Kyrgyzstan 26-08-1995 -
24. Lao Peoples Democratic
Republic 08-12-2004 -
25. Lebanon 09-01-2001 28-03-2003
26. Malaysia 17-07-1995 30-11-1995
27. Mauritius 03-04-1997 03-04-1997
28. Morocco 16-04-2001 -
29. Netherland 04-10-1988 01-10-1989
30. Oman 09-11-1997 04-051998
31. Philippines 23-04-1999 -
32. Portugal 11-10-1996 14-12-1996
33. Qatar 06-04-1999 -
34. Romania 10-07-1995 08-08-1996
35. Singapore 08-03-1995 04-05-1995
36. Spain 15-09-1994 26-04-1996
37. Sri Lanka 20-12-1997 05-01-2000
38. Sweden 12-03-1981 04-06-981
39. Switzerland 11-07-1995 06-05-1996
40. Syrian Arab Republic 25-04-1996 04-11-1997
96
41. Tajikistan 31-03-1994 -
42. Tajikistan 13-05-2004
43. Tunisia 18-04-1996 -
44. Turkey 16-03-1995 03-09-1997
45. Turkey 22-05-2012 -
46. Turkmenistan 26-10-1994 -
47. United Arab Emirates 05-11-1995 -
48. United Kingdom 30-11-1994 30-11-1994
49. Uzbekistan 13-08-1992 15-02-2006
50. Yemen 11-05-1999 -
97
The perusal of above BITs revealed that the same were signed on different dates
by different agencies, department or authorities of the Govt. Following table would
illustrate the position where different govt. agencies and departments were involved in
signing Pakistani BITs102:-
No. Authority No. of BITs signed Countries and Singed Dates
1. President of Pakistan Delegation 01 France (01-01-1983)
2. Prime Minister of Pakistan 01 United Kingdom (30-11-1994)
3. Minister of Foreign Affairs 04
Spain (15-09-1994, UAE (05-11-1995, Denmark (18-07-1996),
Mauritius (03-03-1997) 4. Minister of Commerce 01 Egypt (16-04-2000)
5. Minister for Investment and Privatization 03
Kazakhstan (-08-12-2013), Cambodia (27-04-2004), Laos
(-08-12-2004), Germany (01-12-2009)
6. Ambassador of Pakistan in Kuwait 01 Kuwait (17-03-1983)
7. Ambassador of Pakistan in Bosnia 01 Bosnia (04-09-2001)
8. Ambassador of Pakistan in Belarus 01 Belarus (22-01-1997)
9. Secretary Foreign Affairs 01 Germany (25-11-1959)
10. Special Secretary to Prime Minister for Economic Sector
02 Syrian Arab (25-04-1996), Indonesia (08-03-1996)
11. Secretary Ministry of Industries and Production 03
Italy (19-07-1997), Switzerland (11-07-1995), Singapore (08-03-
1995)
12. Secretary Economic Affairs Division 01 Tunisia (18-04-1996)
13. Secretary General
Finance and Economic Coordination
01 Romania (21-01-1978)
102 Ibid, note 100. pages; 28,29
98
2.4 FAMOUS PAKISTANI CASES AT ICSID
After signing the ICSID convention, there are following eight cases
registered/instituted at ICSID against Islamic Republic of Pakistan (ICSID, 2016)103. Out
of which five have been concluded and three are still pending:-
Case No. Claimant(s) Respondent(s) Status
ARB/13/1
Karkey Karadeniz Elektrik Uretim A.S.
Islamic Republic of Pakistan Pending
ARB/12/1
Tethyan Copper Company Pty Limited
Islamic Republic of Pakistan Pending
ARB/11/8
Agility for Public Warehousing Company K.S.C.
Islamic Republic of Pakistan Pending
ARB/03/29
Bayindir Insaat Turizm Ticaret Ve Sanayi A.S.
Islamic Republic of Pakistan Concluded
ARB/03/3 Impregilo S.p.A. Islamic Republic of Pakistan Concluded
ARB/02/2 Impregilo S.p.A. Islamic Republic of Pakistan Concluded
ARB/01/13
SGS Société Générale de Surveillance S.A.
Islamic Republic of Pakistan Concluded
ARB/87/4 Occidental of Pakistan, Inc. Islamic Republic of Pakistan Concluded
103 International Center for Settlement of Investment Disputes. (2016, July 10). List of Pakistani Cases. Retrieved from International Center for Settlement of Investment Disputes website: https://icsid.worldbank.org/apps/ICSIDWEB/cases/Pages
99
The first case was filed by Karkey Karadeniz Elektrik Uretim A.S. (Turkish)
against Islamic Republic of Pakistan. The subject dispute of case was of power
generation equipment. It involves BIT of Turkey-Pakistan 1995. The Claims of the case
arises out of alleged unlawful detention by the Govt. of four electricity generating vessels
owned by claimant. There are other averments regarding alleged breaches of contract
payment obligations for electricity generated. As a provisional measures, ICSID has
allowed the vessel to leave the territory of Pakistan for inspection and repairs to maintain
the vessels flag-register and certification. The case is pending and is yet concluded.
The second case was filed by Tethyan Copper Company Pty Ltd, Australia. The
subject dispute was mineral exploration operation. It involves BIT-Pakistan-Australia
(1998). The claims of the case arises out of exploration of deposits of gold, copper and
other minerals in Chaghai district of Baluchistan. For such purposes, the claimant
submitted to the Licensing authority for an application of mining license, which was
refused by Mining Authorities. Thereafter, claimant went to ICSID against the refusal to
grant a Mining lease. The case is still pending and yet not concluded.
The third case was filed by Agility for Public Warehousing Company K.S.C
(Kuwaiti). The subject dispute of case was customs clearance services. It involves BIT
Kuwait-Pakistan 1983. The claims of the case arises out of outstanding payments from
govt. concerning claimants automated customs clearing system to assess duties on
imports passing through Pakistani Ports. The case is still pending and not concluded.
The fourth case was filed by Byindir Insaat Turizem Ticaret Ve Sanayi A.S.
(Turkish). The subject dispute was highway construction contract. It involves BIT-
Turkey-Pakistan 1995. The claims arises out of the implementation of a construction
contract concluded between the National highway authority of Pakistan and the investors
for indirect expropriation. However, after arguments, the case was dismissed by ICSID
on the ground that the claim of claimant fell short of evidence required to substantiate a
MFN claim.
The fifth case was filed by Impregilo S.p.A (Italian). The subject dispute was
Hydropower project. It involves BIT Pakistan Italy-1997. The claims arises out of delays
100
in the performance of two concession agreements entered into between the investor and
Pakistan Water and Power Development Authority, in connection to a hydropower
project. However, during proceedings, the settlement reached between parties and arbitral
proceedings discontinued.
The sixth case was also filed by filed by Impregilo S.p.A (Italian). The subject
dispute was construction project. It involves BIT Pakistan Italy-1997. The claims arises
out of Pakistan Water and Power Development Authority (WAPDA) failure to turn over
the land necessary to implement certain construction contract, among other acts and
omissions to WAPDA that allegedly impeded the investors ability to proceed according
to Schedule. However, during proceedings, the settlement reached between parties and
arbitral proceedings discontinued.
The seventh case was filed by SGS Societe Generals de Surveillance S.A.
(Swiss). It involves BIT Switzerland and Pakistan, 1995. The claims arising out of
Pakistan’s alleged nonpayment of invoices to the in investors and its attempt to terminate
an underlying agreement for the provisions of services relating to customs clearance and
control processes in Pakistan. However, a settlement reached between parties and arbitral
proceedings discontinued. The last case was filed by Occidental of Pakistan, Inc. (U.S).
The subject dispute was petroleum concession. However, due to settlement of claim, the
proceedings of arbitration was discontinued by the claimant.
2.5 THE INTERNATIONAL LAW GUARANTEES CONTAINED IN
PAKISTAN BITS
The BITs signed by Pakistan with different countries have broad protections to
the foreign investments of other treaty partner104. As the capital importer, Pakistan has
given special attention to reciprocity of obligations in BITs because Pakistan is the state
hosting investment which is needed for its development and betterment of it subjects.
When BITs of Pakistan are compared with Foreign Private Investment (Promotion and
Protection) Act, 1976, it is revealed that investment protections are extensive and broader
104 Protections of investments offered by Pakistan contain almost 32 BITs of Pakistan signed with different countries. These include Germany, Sweden, Kuwait, Korea, Netherlands, China, Turkmenistan, UK, Singapore, Turkey, Romania, Kyrgyzstan, Azerbaijan, Indonesia, Tunisia, Syrian Arab, Denmark, Portugal, Belarus, Mauritius, Italy, Oman, Sri Lanka, Australia, Japan, Belgium, Philippines, Yemen, Egypt, Lebanon, and Morocco.
101
than this legislation (Malik, 2010)105. In order to understand the pattern of investment
protection, the two BITs i.e. UK-Pakistan and Germany-Pakistan BIT are to be taken in
consideration. As per international investment law, BIT is signed between two states. The
scope of BITs are limited to foreign investor instead of local investors. Any person/entity
claiming any rights or obligations would have to fulfill investors’ criteria defined in BIT,
Normally, these people are national persons of home country and business entity having
the force of law in home country. Sometime, mere registration of an entity is sufficient
without divulging into establishing substantial operations of the business in the state
(Malik, 2010)106. But on the other hand, some BITs strictly follow the criteria of
substantial business operations apart from registration107. Needless to mention that there
is no specific requirement, the nationals of the country have control over the business
entity in the country of origin. This concept has given the birth to the practice of ‘treaty
shopping’ whereby any national or citizen of the country including from home country
set up dummy entities in contracting state to get benefits of BITs of two states. There are
specific types of properties that are covered under the definition of investment in BIT.
Investment has broadly been defined in Pakistani BITs than what it constituted
traditionally. The investment guarantees of Pakistan are rather extensive that the local
Pakistan legislation giving protection cover o global investment. For example, Froing
Private Investment (Promotion and Protection) Act, 1976 has Article 2, which says as
under:-
“Foreign Private Investment means an industry, undertaking, or establishment engaged in the production, distribution or processing of any goods, the providing of services specified in this behalf by Federal Government or the development and extraction of such mineral resources and products as may be specified in this behalf by the federal Government.”
Whereas, Pakistan BITs say that “investment” is every kind of assets except the
following (Malik, 2010)108:-
1) “Movable and immovable property as well as any other rights in rem, such as mortgages, liens, and pledges.”
105 Ibid, note 100. page 31 106 Ibid, note 119. page 32 107 For example, Swiss-Pak BIT, has a clause that needs real economic presence in home country of registered corporation. 108 Ibid, note 100. page 34
102
2) “Shares of companies and other kinds of interest in companies.”
3) “Claims to money which have been used to create an economic value or claims or any performance having economic value.”
4) “Intellectual property rights.”
5) “Business concession under public law, including concession to search for, extract, and exploit natural resources.”
In order to further understand, two definition of investment given in South-Korea
Pakistan BIT and UK-Pakistan are examined below:
SOUTH KOREA-PAK BIT
(3) The term “investment” shall mean every kind of asset, including, in
particular, but no exclusively:
a) Movable and immovable property and any other property rights such as mortgages, liens or pledges;
b) Shares, stock and debentures of companies wherever incorporated or interests in the property of such companies.
c) Claims to money or to any performance under contract having a financial value.
d) Intellectual property rights;
e) Business concession conferred by law or under contract, including concluding concessions to search for, cultivate, extract or exploit natural resources.
UK-PAK BIT
(a) “investment” means every kind of asset acquired in accordance with the
laws of regulations of the Contracting Party in whose territory the
investment is made and in particular, though not exclusively, includes:
i) movable and immovable property and any other property rights such as mortgages, liens or pledges;
103
ii) shares in and stock and debentures of a company and any other form of participation in a company;
iii) claims to money or to any performance under contract having a financial value;
iv) intellectual property rights, goodwill, technical processes and know-how;
v) business concession conferred by law or under contract, including
concessions to search for, cultivate, extract or exploit natural
resources.
Both above definitions almost resembles each other. Investment in Pakistan-BIT
include a wide category of assets, in which commercial transaction and contract and
intellectual properties rights are also included. Intellectual property rights enforcement is
week in Pakistan. Apart from above definition of investment, if any investor intends to
bring claims under ICSID, the investment ought to fulfill the criteria of investment under
the ICSID convention (Malik, 2010)109. The Convention though does not define
investment, but it leaves to the arbitration tribunals to do so on case to case basis. As per
decisions of tribunals, investment is defined to cover a wide range of economic
transaction. On the basis of Survey of cases decided by tribunals, following are
considered to fall within the definition of “investment” (Malik, 2010)110:-
a) “Acceptance of promissory notes where a State issues them as an
acknowledgement of its debt to a company but fails to make repayments
(Fedax NV v. Republic of Venezuela)”;
b) “The construction and operation of hotels where a State fails to provide
promised financing or seizes control of the enterprise (Holiday inns SA v.
Morocco & Amco Asia Corporation v. Republic of Indonesia)”;
c) “The cultivation of crops and the construction of a textile factory where a
State fails to pay for materials (Adriano Gardella SpA v. Cote d’Ivoire)”;
109 Ibid, note 100. page 36 110 Ibid, note 100. pp. 36 and 37
104
d) “The construction and management of a fertilizer factory where a State has, in
breach of contract, failed to pay construction costs (KlocknerIndustire-
Anlagen GmbH v. United Republic of Cameroon)”;
e) “The mining of bauxite where a State raises a production levy in breach of a
‘no further tax’ agreement (Alcoa Minerals of Jamaica Inc. v.Jamaica)”;
f) “An oil distribution venture where a State fails to comply with the terms of a
share purchase agreement (Agip SpA v.The People/s Republic of Congo)”;
g) “A bottle manufacturing and mineral water production venture where a State
fails to meet its obligation to contribute share capital and subsequently
expropriates the investors’ property (SARL Benvenutti and Bonfant v. The
People’s Republic of Congo)”.
Apart from above, in the claim of SGS against Pakistan, the tribunal gave its
verdict that “pre-inspection customs services agreement” is an investment based on the
broader definition of investment in Swiss-Pak BIT. The tribunal further held that
investment definition includes ‘every kind of asset’ so also ‘claims to money or any
performance having economic value’. It also included, all other rights given by law, by
contract, or by decisions of the authority in accordance with the law’. During
investigation, the tribunal came to conclusion that since SGS incurred expenditures in
meeting its obligation under PSI Agreement, therefore, it constituted investment under
Swiss-Pak BIT. The Tribunal’s conclusion shows the importance of investment, which
not only covers activities and expenditures incurred by the investor i.e. a contract of
services given by SGS to Pakistan for a while. Sometimes, BIT does not have clauses
relating to acts of govt. which has led to an argument that as to whether conducts of
nationalized entities are binding on the nationals govt. The answer is provided in the
‘responsibility of State’ by ILC (international Law Commission) in following words
(Malik, 2010)111:-
111 Ibid, note 100. page 38
105
“The conduct of an organ of an entity which is not part of formal structure of the State or of a territorial governmental entity, but which is empowered by the internal law of that State to exercise elements of governmental authority, shall also be considered as an act of the state under international law, provided that organ was acting in that capacity in the case in question”
In one of recent decision of ICSID Tribunal (Compana de Aguas v. Argentine
Republic 40, ILM (2001), 457, more like a finding is given consistent with above
statement of ILC as under:-
”Under international law, and for the purposes of jurisdiction of this Tribunal, it is well established that actions of a political subdivisions of a federal state, such as the Province of Tucuman in the federal state of the Argentine Republic, are attributable to the central government. It is equally clear that the internal constitutional structure of a country cannot alter these obligations.” (Malik, 2010)112
International law guarantee varies from BIT to BIT. But most of model BIT
followed one and same line of guarantees that guaranteed certain rights, therefore, it is
advisable that the wordings of each BIT are to be looked into. As pointed out earlier, BIT
in scope covers better and vast protections to investments than as provided under the
customary international law and that of national laws. Most common protections found in
most of BITs are as under (Malik, 2010)113:-
i) Protection against breach of the investment contract
ii) Full protection and security for the investment
iii) Fair and equitable treatment
iv) Most favored nation treatment for the investment
v) National treatment for the investment
vi) Compensation for losses due to war or riot
vii) Protection against expropriation or nationalization
viii) Rights to repatriate investment and returns
ix) Right to international arbitration for violation of the treaty provisions
112 Ibid, note 100. page 39 113 Ibid, note 100. page 40
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The above rights are no doubt, far broader, which has also triggered controversy
amongst national investors. According to them, these BITs sometimes have better rights
than local investors. Though BIT, are designed to protect the investment of foreigner, but
on the other hand, they tend to give more an extra edge in enforcement of rights over
nationals. For example, the Act of 1976 is more limited in scope in giving rights and
guarantees that includes repatriation rights that was made subject to Foreign Exchange
Regulations act, 1947 of Pakistan. The foreign nationals were treated alike domestic
investors with regard to application of laws, rules and regulations. The rights accrued to
foreign investors can be enforced through national courts and there is no provisions
available to investor in giving access to international tribunal (Malik, 2010)114.
Many of BITs of Pakistan have a special guarantee clause that resembles in
almost all of BITs of countries that host country would provide fair and equitable
treatment to foreign investors. These are common characteristics in BITs. This clause is
used to control state conduct, which has become controversial with a passage of time.
The interpretation of this clause had led FET clause overstretched than the ‘standard of
treatment for liens’ provided in international law. It has also been interpreted to cap the
host country from impracticable action against international investment also force these
countries to ensure transparent legal framework for investment. This clause is equally
applicable both on executive and judicial action. In Pakistani context, this clause is often
violated due to lack of consistency of govt. policies and judicial decision. Like, in the
case of Occidental v.Ecuador (2004), the tribunal concluded that the state of Ecuador
violated the standard when its tax authorities refused to give VAT reimbursement on oil
export to Occidental Company. Notwithstanding the fact it originally entitled for at the
time of investment. This move of Ecuador was termed by the tribunal an extreme
measures note to provide ‘stable and predictable regulatory framework’, which is also
against international law and FET standard of treaty. Following are two examples of
Swiss-Pak BIT and UK-Pakistan BIT where this standard provided
114 Ibid, note 100. page 40
107
SWISS-PAK BIT
“Article 4: Protection, Treatment”
1) “Each Contracting Party shall ensure fair and equitable treatment within its territory of the investments of the investors of the other Contracting Party. This treatment shall not be less favourable than that granted by each Contracting Party to investments made within its territory by its own investors, or than the granted by each Contracting Party to the investments made within its territory by investors of the most favoured nation, if this latter treatment is more favourable.”
UK-PAK BIT
“Article 2: Promotion and Protection of Investment”
1) “Investments of nationals or companies of each Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party. Neither Contracting Party shall in any way impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment or disposal of investments in its territory of nationals or companies of the other Contracting Party. 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.”
Another significance of Pak-BIT are that they consist of standard of “protection
and security guarantee”115 this obligation comes into play due to third party and their
malafide action and malafide actions of govt. officials causing damage to property of
investor and state was unable to provide due diligence. This clause is triggered where as
host country fails to adopt any legitimate protective measures to avoid damage. The
minimum standard of international law regarding ‘full protection and security’ are no
resorted to expressly in Pakistan-BIT, leaving the field open for tribunal to create much
wider standard. The case of AAPL v.Sri Lanka, the tribunal concluded that the govt. of
Sri Lanka failed to apply due diligence in protection of investment in Shrimp Farm,
which was damaged in military action between its military and terrorists’ activities. Thus,
this violated the guarantee contained in UK-Sri Lanka BIT. The tribunal held that the Sri
115 Based on 68% Pakistani BITs.
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Lanka ought to provide precautionary shelter from destroying and wiping of investment
and full protection and security must be interpreted in the way to give it ‘natural and
obvious’ meaning. In the case of AMT (AMT v. Zaire), the investor complained of
destruction of his investment at the hands of Zairian armed forces, when there were riots
and internal disturbance in Kinshasa before the tribunal, while giving decision, the
tribunal held that irrespective of fact whether destruction to the investors’ assets were
caused by Zairian army or by some other miscreant, the Zairian govt. was under
‘obligation of vigilance’ and it is responsible for not providing ‘full protection and
security’ against riots and internal disturbance. Given the decision of last case law,
Pakistan security condition is also not good, where often foreign investors and their
investment are targeted by non-state actors and rioters and the govt. action for protecting
and safeguarding their properties against damage can be attacked by investor under this
standard ‘full protection and security guarantee’. Following are few examples, where as
to how this security clause appear in Pakistani BIT:-
CHINA-PAK BIT
“Article 3:”
1) “Investments and activities associated with investments of investors of either Contracting Party shall be accorded equitable treatment and shall enjoy protection in the territory of the other Contracting Party.”
JAPAN-PAK BIT
“Article 5:”
“Investments and returns of investors of either Contracting Party shall receive the most constant protection and security within the territory of the other Contracting Party.”
UK-PAK BIT
“Article 2: Promotion and Protection of Investment”
2) “Investments of nationals or companies of each Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party. Neither Contracting Party
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shall is any way impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment, or disposal of investments in its territory of nationals or companies of the other Contracting Party.”
In case of any war or riot takes place in host country, then what is the remedy
available to the investor for protection of their investments. As most of the time, BITs are
executed between developed country and under-developed countries, which are war-torn
and suffering from internal disturbances. To answer this, the clause of compensation for
losses due to war and riot are inserted in BITs. It says that if investors is caused loss due
to internal exigencies, state of emergency, revolution, military take-over, coup or any
other conflicts, then investor compensation should be at par with treatment given to any
third country. This clause further says that incase of army action for requisition or
destroying the investment, the investor would be given full compensation and it is
immaterial as to how local or third state investors are treated. For example, UK-Pak BIT
has a following clause covering such damage.
“Article 4: Compensation for Losses”
1) “Nationals or companies of one Contracting Party whose investment in the territory of the other Contracting Party suffer losses owing to war or other armed conflict, revolution, a state of national emergency, revolt, insurrection of riot in the territory of the latter Contracting Party shall be accorded by the latter Contracting Party treatment, as regards restitution, indemnification, compensation or other settlement, no less favourable than that which the latter Contracting Party accords to its own nationals of companies or to nationals or companies of any third State. Resulting payments shall be freely transferrable.”
2) “Without prejudice to paragraph (1) of this article, nationals and companies of on Contracting Party who is any of the situations referred to in that paragraph suffers losses in the territory of the other Contracting Party resulting from:
a) Requisitioning of their property by its forces or authorities, or;
b) Destruction of their property by its forces or authorities, which was not caused in combat action or was not required by the necessity of the situation shall be accorded restitution of adequate compensation. Resulting payments shall be freely transferable.”
Breach of BIT at the hands of host states is often disliked under international
investment law. Every host state is under guarantee to follow any obligation made with
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foreign investors with their investments, which are also viewed as controversial, but the
same is still found in almost all BITs. The tribunal justified this “umbrella” clauses and
their breach is also termed as a breach of BIT, attracting international law remedies and
procedures. This umbrella clause is found in UK-Pak BIT as under: -
“Article 2: Promotion and Protection of investment“
“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.”
Equal treatment of investors by host state with its national is also found in modern
BIT. According to this clause, investment of investor would not be treated differently
than the nationals of host state. Host country cannot favor their own nationals than
foreign investors. For example, if national concerns is given a particular benefit by host
govt., then foreign investor has to be provided same benefit/relief as well, otherwise, this
would be the violation of this clause. The Japan-Pak BIT mentions this benefits in
following words: -
Article 3:
“Investors of either Contracting Party shall within the territory of the other Contracting Party be accorded treatment no less favourable than that accorded to investors of such other Contracting Party in respect of investments, returns and business activities in connection with the investment.”
Then, there is Most Favoured Nation (MFN) standard incorporated in BIT. It
means no investors would be discriminated and he would be provided equal treatment as
the same is provided to national of home state. This is due to easiness for the investor
bringing in more benefits, host state has entered into with other countries. In the case of
Bayindir (Bayindir v. Pakistan), the complainant successfully imported the fair and
equitable clause from Swiss-Pak BIT, which was missing in Turkey-Pak BIT. This clause
is intended to protect the investors and his investment from mistreatment at the hands of
host state. Moreover, the friendly treatments to other nationals of this countries, may also
be claimed under this clause. Like UK-Pakistan BIT provides as under:-
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“Article 3: National Treatment and Most-favoured Nation Provisions”
1) “Neither Contracting Party shall in its territory subject investments or returns of nationals of companies of the other Contracting Party to treatment less favourable than that which it accords to investments or returns of its own nationals or companies or to investments or returns of nationals or companies of any third state.”
2) “Neither Contracting Party shall is its territory subject nationals of companies of the other Contracting Party, as regards their management, maintenance, use, enjoyment or disposal of their investments, to treatment less favourable than that which it accords to its own nationals or companies or to nationals of companies of any third states.”
All Pakistan-BITs have a guarantee clause that if foreign investment is
expropriated by state, the owner would be compensated. This clause is also mentioned in
1976 Act. Main concern for investor before investing into host state is the safety of their
assets being ‘nationalized’ or ‘expropriated’. Such concerns have been taken care of by
draftsman in Pakistan in BIT. The expropriation and ‘measures tantamount to
expropriation’ would only take place, where it is deemed appropriate for public benefits
and against compensation. The expropriation is permissible under investment subject to
the following:-
1) “For a public purpose”;
2) “Non-discriminatory”;
3) “In accordance with due process”; and
4) “Subject to prompt, adequate and effective compensation.”
The expropriation clause has also been interpreted to provide protection against
indirect expropriation, which usually takes place through ‘regulatory’ expropriation
without appropriate compensation. This clause remained a height of controversy as it
tests the purported measures by host state that has caused erosion to global investment are
infact falls within the definition of expropriation and thus compensable. The ICSID
tribunal has itself interpreted this expropriation guarantee clause broadly in the case of
Metaclad Corporation v. United Mexican States116, which concluding in favor of the
116 Award of 30 August 2000, ICSID Case No.ARB(AF)/97/1
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Metaclad, who was tasked to construct and operate a hazardous waste landfill, in Mexico,
but the local authorities refused to give it license, the tribunal held as under:-
“Covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use of reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the Host State.”
In another case (Goetz v.Burundi), the tribunal declared the revocation of license
of Mr. Goetz to carry out a precious metals business in Free Trade Zone is in violation of
property right of the foreign investor, for which Burundi had to restore the license or
provide compensation. Pakistan BITs also stipulates compensation for expropriation
under the term ‘prompt, adequate and effective’ and “fair and just” compensation.
However, no cover against regulatory measures are provided in these Pakistan BIT,
therefore, wide open field for interpretation by tribunals of this clause under BITs are still
there. For example, the expropriation clause in UK-Pakistan BIT is as under:-
“Article 5: Expropriation”
1) “Investments of nationals or companies of either Contracting Party shall not be nationalized, expropriated or subjected to measures having effect equivalent to natiolization or expropriation (hereinafter referred to as “expropriation”) in the territory of the other Contracting Party except for a public purpose related to the internal needs of that Party on a non-discriminatory basis and against prompt, adequate and effective compensation. Such compensation shall amount to the genuine value of the investment expropriated immediately before the expropriation or before the impending expropriation became public knowledge, whichever is the earlier, shall include interest at a normal commercial rate until the date of payment, shall be made without delay, be effectively realizable and be freely transferable. The national of company affected shall have a right, under the law of the Contracting Party making the expropriation to prompt review, by judicial or other independent authority of that Party, of his or its case and of the valuation of his or its investment in accordance with the principles set out in this paragraph.”
2) “Where a Contracting Party expropriates the assets of a company which is incorporated or constituted under the law in force in any part of its own territory, and in which nationals or companies of other Contracting Party own shares, it shall ensure that the provisions of paragraph (1) of this Article are applied to the extent necessary to guarantee prompt, adequate and effective
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compensation in respect of their investment to such nationals or companies of other Contracting Party who are owners of those shares.”
In every BIT, there are inherent provisions regarding transfer of returns of
investment from host state. Almost all BITs of Pakistan contains such provisions for
transfer of funds in respect of investment. Only, 1976 Act, limits the right to transfer
investment returns and Capital and made them subject to Foreign Exchange Regulation of
Pakistan. But, govt. of Pakistan has to compensate foreign investor, if it exercise control
in a financial crisis and causes any delay in repatriation of proceeds. Like, Article 5 of
Pak-Swiss BIT says as under: -
“Article 5: Free Transfer “
“Each Contracting Party in whose territory investment have been made by investors of the other Contracting Party shall grant those investors the free transfer of the payments relating to these investments, particularly of:
a) interests, dividends, benefits and other current returns;
b) repayments of loans;
c) amounts assigned to cover expenses relating to the management of investment;
d) Royalties and other payments deriving from rights enumerated in article a, Paragraph (2), letters (c), (d) and (e) of this Agreement;
e) Additional contributions of capital necessary for maintenance or development of the investment;
f) The proceeds of the sale or of the partial or total liquidation of the investment, including possible increment values.”
Unlike, domestic arbitral dispute and litigations, all BITs of Pakistan consist of
investment dispute resolution clauses. These BITS give the investor to choose either
ICSID or UNCITRAL arbitration forum for resolution of their claim. This right by
investor can be resorted to if amicable resolution of dispute and local remedies are failed.
Such recourse is always dependent on wording to wording of BITs. One of investor-
dispute resolution clause under Pak-Swiss BIT states as under:-
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“Article 9: Disputes between a Contracting Party and an investor of the other Contracting Party”
1) “For the purpose of solving disputes with respect to investment between a Contracting Party and an investor of the other Contracting Party and without prejudice to of this agreement (Disputes between Contracting Parties), consultations will take place between the parties concerned.“
2) “If these consultations do not result in a solution within twelve months and if the investor concerned gives a written consent, the dispute shall be submitted to the arbitration of the International Centre for Settlement of Investment Disputes, instituted by Convention of Washington of March 18, 1965, for the settlement of disputes regarding investment between States and nationals of other States. Each party may start the procedure by addressing a request to that effect to the Secretary-General of the Centre as foreseen by Article 28 and 36 of the above mentioned Convention. Should the parties disagree on whether the conciliation or arbitration is the most appropriate procedure, the investor concerned shall have the choice. The Contracting Party which is party to the dispute can, at no time whatsoever during the settlement procedure or the execution of the sentence, allege the fact that the investor has received, by virtue of an insurance contract, a compensation covering the whole or part of the incurred damage.”
3) “A company which has been incorporated or constituted according to the laws in force or the territory of the Contracting Party and which, prior to the origin of the disputes, was under the control of nationals or companies of the other Contracting Party, is considered, in the sense of the convention of Washington and according to its Article 25(2) (b), as a company of the latter.”
4) “Neither Contracting Party shall pursue through diplomatic channels a dispute submitted to the arbitration of the Centre, unless:
a) The Secretary-General of the Centre or a commission of conciliation of an arbitral decides that the dispute is beyond the jurisdiction of the letter; or
b) The other Contracting Party does not abide by and comply with the award rendered by an arbitral tribunal.”
It is not that every BIT once executed cannot be terminated or ended. All Pakistan
BITs have life duration. It is provided in a separate clause, which is called ‘Duration and
Termination’. This duration in BITs is usually of 10 years at minimum and 15 to 20 years at
maximum, with an option to continue the same or terminate it by causing termination notice.
The period of termination is 1 years, but investments of terminated BIT enjoy protection
from 10 to 20 years. The ‘Duration and Termination’ of UK-Pak BIT states as follows:-
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“Article 14: Duration and Termination”
“The Agreement shall remain in force for a period of ten years. Thereafter, it shall continue in force until the expiration of twelve months from the date on which either Contracting Party shall have given written notice of termination to the other. Provided that in respect of investments made whilst the agreement is in force, its provisions shall continue in effect with respect to such investments for a period of twenty years after the date of termination and without prejudice to the application thereafter of the rules of general international law.”
2.6 MODEL BIT OF PAKISTAN
Since execution of first BIT by Pakistan with Germany, Pakistan has been
following other model BIT of countries executed from time to time. In other words,
Pakistan does not have its own template of BIT. Due to impracticalities and multiple
litigations and costly arbitration as a result of these BITs have failed in its purpose.
Instead of doing any better, it causing harm to Pakistan in terms of depleting resources
and money. Therefore, Pakistan has decided to draft its own template, which would
provide an alternative way for replacing exiting BITs with different countries and in
future BIT would be negotiated on such template117. The task has been assigned to
BoI/the apex regulator of the Pakistan looking after the affairs of investment in the
country. An important characteristics of new model is that it would safeguard the
interests of Pakistan. The Govt. would not be made liable for private investor disputes.
Alternatives Disputes Resolution (ADR) would be made compulsory, which foreign
arbitrators would be decided in Advance through consensus.
As per new model, all investment contracts would be routed to Law and Justice
Ministry by BoI for vetting. The aggrieved investor in case of violation or delay in the
implementation of agreement by concerned agencies can seek help of BoI, which in
return set up a panel of arbitration lawyers to bring an amicable domestic solution. BoI in
its founding statute has already mandated to negotiate or finalize agreements for
protecting and promoting the investment with other countries. BoI successfully
renegotiated 1959 Pak-Germany BIT in November, 2009, Pak-Kuwait BIT in Feb, 2010
and Pak-Turkey BIT in April, 2012. The countries around the world (Venezuela, South
117 Ahmed A. (2015, March 02). New bilateral investment treaty model. The Daily Dawn
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Africa, Brazil, Argentina, Ecuador and Indonesia) who are revising their BITs as the
heavy costs of arbitration and awards had crippled their economies. Pakistan is also
following positive direction as it has refused the US model BIT, which stalled for quite a
long time, which shows that Pakistan is encouraging its own say in BIT, which is good
development in International Investment Law, given the lasting repercussion the BITs
have brought over the last sixty years and desired investment which cannot be avoided,
therefore, new BIT template under process would be a new milestone and would smooth
the investment environment and contribute towards improvement of lives of its nationals.
2.7 PAKISTAN VIS-À-VIS INTERNATIONAL INVESTMENT LAW
International investment law is untapped yet an important area of law for Pakistan.
As discussed earlier, Pakistani investment laws are of two folds, i.e. i) domestic laws and
ii) Pakistan Bilateral Investment Treaties regime. Pakistani BITs are in addition to national
laws covering the subject. Under international investment law, it is well settled that breach
of international law commitment would be viewed independent than domestic law. For
instance, Pakistan cannot avoid investment agreement obligations on the ground that its
national law intended to prevent states to amend the national laws in a way to wriggle out
from international obligation. Even, tribunals in their decisions held the view that they are
not bound by order and judgments of courts in host countries. Like SGS v. Pakistan, ICSID
tribunal continued with arbitration proceeding invoked for settlement of claims under Pak-
Swiss BIT irrespective of the judgment of Supreme Court of Pakistan that neither ICSID
convention nor Pakistan-Swiss BIT was made part of national laws, therefor, rendered it
unenforceable. Under international laws, it is clear that obligation of BITs are subject to
intentional law, therefore, it would not for Pakistan to defend its conduct contrary to such
obligations relying on national law. This obligations is equally binding on all executive,
legislation and judicial branches of Pakistan.
From 1997, Pakistan significantly opened its economy for foreign investment and
allowed foreign investment in many sectors in this regard. In furtherance to earlier policy
of 1997, federal govt. opened all sectors of economy except specifically prohibited on
restricted for want of national security and public safety. In 2013 policy, foreign investment
is granted the same status as that of local investors. In essential, investment regime in
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Pakistan is governed by three national law i.e. “Foreign Exchange Regulation Act, 1947”,
“The Foreign Investment Protection and Promotion Act, 1976” and “The Protection of
Economic Reforms Act, 1992”. Pakistan is also signatory to 47 BITs with different
countries and 52 treaties for avoidance of double taxation. Apart from BITs and its
interpretation by tribunals and above national laws, the judiciary of Pakistan has also
contributed its national investment law. Like, in “Suleiman Daud v.Lahore Development
Authority” (Pakistan Corporate Law Decisions, 2008)118 in which Pakistani American who
bought immovable property from the proceeds of foreign exchange sent through normal
banking channels and said property was forcefully acquired by govt. Land authority, where
the Lahore High Court relying on section 8 of the Foreign Investment Protection and
Promotion Act, 1976 held that the property of said investor is excluded from acquisition
process. In “Wattan Party v. Federation of Pakistan” (Pakistan Law Decisions, 2006)119,
the Supreme Court of Pakistan while declaring the privatization of Steel Mills Corporation
as illegal held that privatization process so adopted in the corporation is bleak with acts of
omission and commissions at the hands of certain state departments, which also violated
provisions of laws and rules that caused adverse effects on pre-qualification of member of
successful consortium. In the latest case(Pakistan Supreme Court Monthly Review,
2013)120, the Supreme Court of Pakistan held that any foreign investment into territory of
Pakistanis found to be derogatory and is against the laws of Pakistan would be unlawful,
irrespective investment is covered by any BIT of Pakistan, it may have entered into. The
court further held that foreign investment in Pakistan is subject to Article 5 of the
Constitution of Pakistan, 1973, which provides for obedience to the law and the
Constitution of Pakistan, 1973. From survey of above case laws, it is revealed that
Pakistani courts are somehow patriotic in treating the foreign investment and had played a
significant part of local foreign investment laws.
118 2008 CLD 850 119 PLD 2006 SC 587 120 Maulana Abdul Haque Baloch v.Govt. of Pakistan through Secretary Industries and others, 2013 SCMR 511
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CHAPTER 3
CHINESE FOREIGN INVESTMENT LAWS AND PROCEDURE
3.1 INTRODUCTION
China is the socialist country and is world’s second largest economy. It is world’s
fastest growing major economy over the past thirty years (International Monetary Fund,
2013)1. It is considered as a major global destination for manufacturing and exporting of
goods in the world, thus becomes a major role player in the International trade. China
became the member of WTO in the year 2001(World Trade Organization, 2015)2. So far,
it has almost investment agreements with several countries. The voluminous trade
activities in the inter Asia and its trade role led it to become a major financer country in
the world after US. Due to such expansion, the first ever Asia Infrastructure Investment
Bank was launched by the Chinese govt. in 2015 (The Wikipedia, 2015)3.
The present growth of China was owing to adoption of “Five Year Plan” for
economic development. Right now, fifth year plan is currently being implemented. From
1978 to 2005, per capita income has rapidly grown up. In 1980, the China concentrated
on its vast and inefficient agriculture sector. After ten years, it focused on restructuring
the industrial sector. Most of investment related activities or investment in China are
carried out by enterprises that are least under the control of State. Most of them are being
regulated by Local govt. The present Chinese investment climate was due to reform that
has been made in the last two decades. In the same year of 1980, China restricted its
foreign investment to export oriented operations and foreign investors are only allowed if
they form joint venture partnership with Chinese firms. In today’s China, 58% to 60% of
China’s imports and exports are done by foreign invested entities (The Ministry of
Statics, china, 2015)4. In 1990, the govt. of China liberalized foreign investment regime
1International Monetary Fund. (2013, April 16). Report for Selected Countries and Subjects. Retrieved from International Monetary Fund website: http://www.imf.org 2World Trade Organization. (2015, Jan 20). WTO - China - Member information. Retrieved from World Trade Organization website: http://www.wto.org 3The Wikipedia, Free Encyclopedia. (2015, Jan 20). Economy of China. Retrieved from The Wikipedia Website: http://en.wikipedia.org/ wiki/Economy_of_China#cite_note-21 4The Ministry of Statistics. (2015, Jan 22). China Statistical Yearbook 2007, Table 18-14.Retrieved from Ministry of Statistics website: http://www.stats.gov.cn/tjsj/ndsj/2007/indexeh.htm
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by allowing foreign investment to manufacture and sell goods in domestic markets. In the
year 1997, China approved nearly 21,046 foreign investment projects and received over $
45 billion in FDI. Foreign investment is deemed to be strong derivatives in China’s rapid
expansion in world trade, which was also responsible for urban jobs. Today in about half
of production of Chinese exports, the foreign invested enterprises are contributing.
Statistics showed that from 1993 to 2001, China was second largest recipient of FDI after
US. The major development in history of Foreign Investment in the country was
establishment of Shanghai Free Trade Zone in September, 2013.
3.2 CHINESE FOREIGN INVESTMENT LAWS
China for foreign investors is alluring, but its legal system is complex (Vai lo Lo
and Xiaowen, 2005)5. It is felt important that basic knowledge of Chinese legal system is
crucial for foreign investors prior investing into China. In December, 2001, after its entry
into WTO, the foreign investors felt pleased as they wanted to establish their presence in
this country. It was expected that after entry into WTO, the Chinese Govt. would carry
out trade liberalization, which would result into investment opportunities for foreign
investors (Vai lo Lo and Xiaowen, 2009)6. The present China is ruled by Chinese
Communist Party, who defeated Kuomintang and established Peoples Republic of China
in 1949. After coming into power, it abolished Kuomintang’s legal system of “Semi-
feudal” or “Semi Colonial”. The Socialist party initiated several mass campaign such as
land reform movement and the movement against a “three Evils”. Only a handful laws
were enacted during this period. Meanwhile, the govt. carried out nationalization and
collectivization measures, which resulted into state owned enterprises. In essence,
Chinese Legal System is based on Soviet Union in adopting a command economy. After
different revolution in China, the first constitution was promulgated in the 1954. In 1956,
the party launched 100 flowers movement, to let people of China spoke out and criticized
the party. Hundreds of lawyers and judges who were outspoken were sentenced to “re-
education through labour”. In late 1970’s, new leadership of Deng Xiaoping decided to
modernize the country’s industry, agriculture, natural defense and Science and
5 Vai Io Lo, Xiaowen Tian [2005], Law and Investment in China: London: Routlegde 6 Vai Io Lo, Xiaowen Tian [2009], Law for Foreign Business and Investment in China: London: Routlegde
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Technology. To attract foreign capital, technology and management expertise, China
passed its first foreign investment legislation in the year 1979 i.e. “Sino Foreign Equity
Joint Venture”. On economic front, the govt. also established four economic zones
(SEZs)- Shezhen, Zhunhai, Shantoou, and Xiamenm, where certain investment incentives
were offered to foreign investors. Subsequently, the govt. designated 14 open Coastal
cities, such as Dalian, Fuzhou, Guangzhou, Shanghai, Ningbo, Qingdao, and Tiajin to
increase the flows of foreign capital and Technology. At present, there is 1982
Constitution, which is in field and it preambles says that the China would adopt a
Socialist Economy.
1. Overview of Chinese Legal Regime For Investment
Over the last thirty years, the Chinese legal regime passed through various phases.
In short, the Chinese investment regime has been categorizes into following four
characters (Li Wanqiang, 2015)7:-
i) The law on foreign investment has transformed from an “enterprise forms
oriented model” to a “Capital Regulation Oriented Model”
ii) The “Playing Field” has got much smoother than ever before.
iii) The areas of foreign investment has been steadily broadened.
iv) Investment protection has been reinforced.
The Chinese Investment law are scattered over or about 24 statutes, rules, and
regulations8. These include following substantial enactment relating to the subject:-
1) Guiding the Direction of Foreign Investment Provisions
2) Sino-Foreign Equity Joint Venture Law
3) Regulations for the Implementation of the Law on Sino-foreign Equity Joint
Ventures
4) Detailed Rules for the Implementation of the Law on Sino-Foreign Cooperation
Joint Ventures
7 Li Wanqiang. (2015, June 6). Chinese Foreign Investment Laws: A Review from the Perspective of Policy-oriented Jurisprudence. Retrieved from http://www.cityu.edu.hk/slw/aplr/Vol19-1/03-Li.pdf 8 See the details of Statues, enactment , rules and regulation that are in force in China for regulating foreign investors, which is available online at http://www.eastlaw.net/chineselaws/FDI/foreigninvestindex.htm
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5) Explanations of MOFTEC on Implementing Certain Articles of Detailed Rules on The Implementation of The Law on Sino-Foreign Cooperative Joint Ventures
6) Law of The People's Republic of China on Chinese-Foreign Contractual Joint
Ventures
7) Law of the People's Republic of China on Wholly Foreign Owned Enterprise
Law
8) Implementation Regulations for the Wholly Foreign Owned Enterprise Law of
the People's Republic of China
9) Detailed Rules for The Implementation of The Law on Wholly Foreign-Owned
Enterprises
10) Interim Provisions on Guidance for Foreign Investment
11) Catalogue For The Guidance of Foreign Investment Industries
12) Measures on Liquidation Procedures for Foreign Investment Enterprises
13) Provisions For The Alteration Of Investors' Equities In Foreign-Funded
Enterprises”
14) Interim Provisions For Submission And Approval Procedure On Electric Power
Project Invested Directly By Foreigners
15) Rules On Procedures For Examination And Approval Of Foreign Investments
On Inventory Assets
16) Interim Provisions on State-Owned Enterprises' Utilizing of Foreign Investment
for Reshuffling
17) Catalogue of Major Industries, Products And Technologies Encouraged For
Development In China
18) Detailed Rules of the Ministry of Foreign Trade and Economic Cooperation
(MOFTEC) on the Approval and Control of Resident Representative Offices of
Foreign Enterprises
19) Provisional Regulations governing Investment within the Territory by Foreign
Investment Enterprises
20) Temporary Rules of Foreign Investors Establishing Travel Agencies In China
21) Provisional Regulations on the Establishment of Foreign-Funded Joint Stock
Companies Limited
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22) Several Regulations Regarding the Change of Ownership Interest of the
Investors in Foreign Investment Enterprises
23) The Law of the People's Republic of China on Chinese-Foreign Joint Ventures”
24) Administrative Regulations on Foreign Invested Telecommunications
Enterprises
2) “Guiding the Direction of Foreign Investment Provisions”
This legislation9 was enacted in the year 2002 keeping in view the principles and
procedure of foreign investment and needs of industrial policies of state. The prime focus
under the legislation was given to national economic and social development plans and to
provide protection mechanism to rights and interests of the investors10. The provisions
are intended to give legal covers to investment and establishment of “Sino-Equity Joint
Venture” and all other related investment projects in China11. For facilitation of these
projects, two important catalogue relating to investment in industrial guidance and
foreign investment particularly focused area of Central and Western Regions Catalogue
have been formulated by State Development Planning Commission with other department
and have it approved from State Council and thereafter were promulgated. These core
catalogue have been made responsible for evaluation and approval of foreign investment
related project12. This legislation divides investment related projects into four categories,
i.e. i) encouraged, ii) permitted, iii) restricted and iv) prohibited. All of four except
permitted are included in the first catalogue of Industrial Guidance. Further elaboration as
to what types of investment projects would be treated as encouraged. These include a)
Sectors of Agriculture, energy, communication and material b) industry oriented
technology that enhances the existing, c) projects as per market demands, d) energy
related project that imparts new technology, e) manpower and resources and f) other
projects related to laws and administrative regulations.
9 The legislation was promulgated by State Council on 11-02-2002. 10 See Article 1 11 See Article 2 12 See Article 3
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According to this legislation, the restricted categories of projects includes i)
projects with backward technology, ii) disadvantages to the reduced resources ecological
environment, iii) exploration mines and mineral, govt. is opening up such categories for
investment13. There are other prohibited projects defined under the enactment and these
include 1) affecting national security or public interest, 2) pollution to environment or
destruction of natural resources, 3) detrimental to land resources, 4) jeopardizing military
installations and 5) mode of production in producing products that are unique to China14.
Any Foreign Investment Project is permitted to expand its scope by govt., if the same
project has a large amount of investment and the project is related to energy,
transportation, urban infrastructure facilities (Coal, petroleum, natural gas, electricity,
railways, highway, ports, airports, urban roads, sewage treatment and garbage disposal
facilities) with a large amount of investment15. If the permitted foreign investment
projects are exporting, then they shall be regarded as foreign investment projects.
Restricted is also regarded permitted projects, if their sale is 70% as export16. Restrictions
on permitted and restricted FIP can be relaxed, if they truly bring advantages to Central
or Western region17. The examination and approval authority are provided for Foreign
Investment Projects. And any FIP if approved in violation of these provisions shall be
liable to be cancelled18. And if FIP is found to have obtained approval by improper
means such as fraud, the approval would be revoked and legal action against delinquent
personnel of examination would be taken19.
3) “SINO-Foreign Equity Joint Venture Law”
The Sino-Foreign Equity Joint Venture Law was passed on 01-07-197920. The
emphasis of the law is for expansion of international economic co-operation and
technological exchange. Furthermore, permission is given to foreign companies to
organize Joint Venture with Chinese Corporation21. The Chinese govt. would protect the
13 See Article 6 ibid 14 See Article 7 ibid 15 See Article 9 16 See Article 10 17 See Article 11 18 See Article12, 13 19 See Article14, 15 20 This enactment was approved on 13-04-1988 at the 1st Session of the 7th National People's Congress. Lateron, it was revised on 31-10-2000 at deliberation at the Revision of the "Law of the People's Republic of China on Sino-foreign Co-operative Enterprises” 21 See Article 1
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investment for foreign companies and their profits due under contract, agreement and
articles of association. No joint venture would be nationalized or expropriated save in
accordance with law, if the same is a pubic interest and due expropriation compensation
would be given22. Even, Joint Venture would be reported to State Foreign Economic
Relations and Trade Administrative Department. These approval authorities would
accord approval within thirty days, whether to approve any Joint venture or not. Once
approves, business license would be obtained and the operation thereafter, would begin.
A Joint Venture would be a limited liability company, in which the investment
contribution by foreign party is restricted to 25%. The profits, risks and losses shall be in
proportion to their contributions to registered capital.23 The contribution to Joint Venture
is not restricted to shares only even any party shall contribute cash, material objects and
industrial rights. The technology and equipment as an investment must be for Chinese
needs. If any Joint Venture is found using outdated technology, the compensation would
have to be given by Joint Venture24. Joint Venture to consist of Board of Director, its size
and composition be determined through negotiations and be stipulated in agreement.
Either of Chinese investor and foreign party shall way have Chairman or vice Chairman.
All powers, functions of BoD shall be to discuss in their meeting in accordance with
terms of contract or Articles of Association. The General Manager or Deputy General
Manager shall be chosen from the parties. All other matters shall be stipulated through
contract25. The labor activities within permissible domain are equally applicable on Joint
Venture and net profit to proportionate of each party would be to their respective shares
after payment of income tax, reserve funds, bonus and welfare funds26. The Joint Venture
is also permitted to open foreign exchange account with its prior permission of State
Foreign Exchange Control Authority and to conduct of exchange transaction in
accordance with laws of China27. The materials to be purchased from both domestics or
international market and Joint Venture is permitted to sell products outside of China and
can establish branch or organization outside. The total net profit can be remitted subject
22 See Article 2 23 See Article 3 and 4 24 See Article 5 25 See Article 6 26 See Article 7 and 8 27 See Article 9
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to law and their agreements28. Wage income and other income of employees may be
remitted through foreign exchange regulations29. However, the operation of permissible
Joint Venture shall be in accordance with types of industry and is called “Joint Venture in
Specified Industry”. The period of J.V in specified industry shall be fixed and if the
parties desirous to extend the period of operation, they can prior to expiry of six months
apply with approval authority who would decide whether or not to approve further
extension30. The Joint Venture may be terminated by agreement after approval of
authority where Joint Venture suffers heavy losses and where one party fails to
perform31. Incase of any disputes, if BoD fails to address, the same would be resolved
through arbitration or arbitral body in China, and if there is no arbitration clause, they
may institute lawsuits.
4) Regulations for the Implementation of the Law on Sino-foreign Equity Joint
Ventures
This legislation was enacted primarily to revise and bring about the existing law
of PRC on “Sino-Foreign Equity Joint Ventures”. It consists of 16 chapters. The chapter I
relates to general principles governing background and basics/purposes of legislation. It
further classifies Joint Ventures, where approval would not be granted32. The
independence of Joint Venture in accordance with Chinese laws were also highlighted in
this legislation33. The chapter II provides for establishment and registration of Joint
Venture in China. The Joint Venture are regulated in China as per terms and conditions of
this chapter. Prior to setting up, the approval and examination has to be obtained from
“Ministry of Foreign Trade and Economic cooperation of PRC34. The State council
further delegated the powers to provinces and subordinates region subject to conditions
stipulated therein.
28 See Article 11 29 See Article 12 30 See Article 13 31 See Article 14 32 See Article 4 33 See Article 5 34 See Article 6
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Under the legislation, the comprehensive documentation are to be submitted prior
to setting up Joint Venture by both Chinese and foreign enterprises35. The language of
Chinese and agreed one foreign language would be used for writing these documents.
The Article 8 speaks of approval or disapproval within three months. The Article 9
provides that registration procedures have to be completed within one month. There are
ingredients, which necessarily to be included in Joint Venture contract36. The Joint
Venture contract shall be governed by Chinese law. The Article 13 provides for
ingredients, which necessarily to be part and parcel of Articles of Associations. The
chapter II describes organization and registered capital of J.V. The chapter IV provides
for methods of contributing investment. Each party to Joint Venture can contribute cash,
buildings, factory premises, machinery, equipment of other materials and/or industrial
property etc. Foreign exchange would be controverted into Renmibi37. The machinery,
equipment of other materials would be subject to examination and approval of
authority38. Under these legislation, only Chinese registered accountant shall verify it and
would issue certificate. The chapter V provides for Board of Directors, it consists of three
members and their terms are four years. The business management office is only used for
daily business management39. The chapter VII talks about the right to the use of site and
its fee i.e. the acquiring of land by Joint Venture will always be on the application with
govt. Incharge of land, who will consider the request in accordance with legislation. The
chapter VIII provides for purchasing and selling of machinery, equipment, raw material
and other provisions for the purposes of running the business of Joint Venture. The Joint
Venture has been given a right to buy them in China or abroad40.
Another important provision of legislation is Article 52, which says that amount
of material need for office or daily life is not subject to restriction. Meaning thereby any
Joint Venture can utilize the required material without any restriction from govt.
agencies. Not only this, the govt. would facilitate selling of finished products in
International market either through itself or through sales representative. Every six
35 See Article 7 36 See Article 11 37 See Article23 38 See Article 27 39 See Article 35 40 See Article 51
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months, as per plan, required items are to be requisitioned and Joint Venture are bound to
submit data in respect of utilization of foreign investment. The chapter IX relates to taxes.
The tax laws of PRC are made applicable upon Joint Venture and its operation. One
important fact of matters is that certain items are reduced and exempted in accordance
with relevant provisions of Chinese Tax Law. The chapter X provides for foreign
exchange control and its regulation. All matters of foreign exchange of Joint Venture
would be regulated according to Rules of Foreign Exchange Control of PRC41.
According to this chapter, the Joint Venture are mandatorily open two accounts i.e. 1)
Foreign Exchange Account and ii) Renminbi Account. Through Article 66, branches and
divisions by Joint Venture in foreign countries shall submit annual statement of assets,
liabilities and annual profit. The loans are further authorized from financial institutions
for foreign exchange loans and Renminbi loan or from banks abroad42. The Article 68
says that Joint Venture are allowed to remit the remaining foreign exchange out of China
only after payment of income tax on salaries of staffs43. The chapter XI provides for
financial affairs and accounting. According to them, PRC’s local laws and procedures on
financial affairs shall be followed44. For running the machinery of financial affairs of
Joint Venture, the Joint Venture shall employ a Chief Accountant or Deputy Chief
Accountant and fiscal year of Joint Venture shall coincide with calendar year from
January, 1 to December, 31 every financial year45. The international accepted accrual
basis and debit and credit accounting system shall be adopted. The Board of Director is
made competent to distribute according to proportion of each party’s investment and no
profits can be distributed unless losses of previous years have been made up46.
The Chapter XII provides for labor and their services in the Joint Venture. All
employment matters of Joint Venture shall be as per relevant provisions of the state on
labor and social security47. Further, the chapter XIII talks about trade unions and their
vested rights. They also provided for grass roots union and their protections are given in
41 See Article 63 42 See Article 67 43 See Article 68 44 See Article 69 45 See Article 70, 72 46 See Article 73, 76, 77, 78 47 See Article 80
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this legislation48. The Chapter XIV provides for duration and dissolution and liquidation
of Joint Venture. The duration of Joint Venture shall be determined in accordance with
provisional Regulations on the Duration of Sino Foreign Equity Joint Enterprises49. The
joint venture can be dissolved on expiry of duration, inability of operation due to losses
or one of contracting parties to fulfill the obligations such as inability of Joint Venture
due to force majeure, inability of Joint Venture to obtain desired objectives50. The Joint
Venture if going to be dissolved then it must be dissolved through liquidation procedures.
After liquidation procedures, the liquidation report would be approved by Board of
Directors and would be submitted to examination and approval authority. The Chapter
XV elucidates settlement of disputes, it gives importance to resolution of disputes
through consultation or mediation or through judicial means, like suits in Chinese
People’s Court, except for matters in disputes, other provisions can be carried out by
Joint Venture.
5) Detailed Rules for the implementation of the Law on Sino Foreign Cooperatives
Joint Ventures, Approved 07-08-1995, promulgated on 04-06-1995
These rules includes ten chapters and are meant for Chinese Foreign Cooperative Joint
Venture. The Article 1 provides for purpose of the legislation. Establishment of every
Chinese Foreign Cooperative Joint Ventures shall comply with development policy and
Industrial policy of PRC51. The work and day to day business would be carried out by the
Cooperative Joint Venture as per Joint Venture Agreement, contract and other allied
documents as per law. Every cooperative Joint Venture is ought to be joint venture with
status of Chinese Legal persons or one without legal52. The competent authority for a
joint venture shall be the competent authority for Chinese party of Joint venture. Its work
is to conduct coordination and assistant in relation to matters of Cooperative Joint
venture53. The Chapter II provides for establishment of a Cooperative Joint Venture.
Under these too, the application for setting up cooperative Joint Venture shall be
examined and approved by Ministry of Foreign Trade and Economic Council or local
48 See Article 82 49 See Article 89 50 See Article 90 51 See Article 2 52 See Article 4 53 See Article 5
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govt54. There are a number of conditions and circumstances, where department or local
govt. office may examine and approve Cooperative Joint Venture55. The Article 7 lays
down requirement of registration. A number of documents are required that can only be
submitted by Chinese Party. These include; application, feasibility report of project, joint
venture agreement, business license, list of Chairman, Deputy Chairman and members of
Board of Directors. The approval or disapproval is within forty five days with approval
authority56. After doing so, certificate of approval by Ministry of Foreign Trade and
Economic Cooperation is given57. There are certain restrictions for approval of the
application. In other words, in following circumstances, the application for establishment
of Cooperative Joint Venture shall not be approved, these includes, if project of
Cooperative Joint Venture revolves around China’s sovereignty, State security, polluting
and damaging the environment and other circumstances involving violation of laws58.
Soon after granting approval, the agreement, contacts and articles of association shall
enter into force. The Article 12 provides for specific items that are compulsorily to be
mentioned in contract of Cooperative Join Venture. These include as follows59:-
1) Name and place of registration, domicile etc.
2) Name and address and business and scope of the Cooperative Joint Venture
3) Total amount of investment
4) Transfer of investment contribution
5) Distribution of income or products
6) Composition of Board of Directors
7) Main production equipment
8) Arrangement of sales of products in or outside of China
9) Arrangement of income tax expenditure of foreign exchange
10) Duration, dissolution and liquidation of Cooperative Joint Venture
11) Obligation and responsibilities arising from the breach of contract
54 See Article 6 55 As per Article 6, following circumstances can competently been examined by Ministry of Foreign Trade and Economic Council or local govt., such as i) amount of investment is whether within the authorization for approval in their respective domain ii) Capital has been raised by applicants themselves and they do not need any assistance from State, iii) where products of Cooperative Joint Venture do not require export quota, and iv) other circumstances in which department or local govt. may examine and approve Cooperative Joint Venture. 56 See Article 7 57 See Article 8 58 See Article 9 59 See Article 12
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12) Principles of handling finance, account, and auditing
13) Settlement between the parties
14) Procedures for amending Cooperative Joint Venture
The chapter II says that as to how the form of organization and Registered Capital
of Cooperative Joint venture should be. The Cooperative Joint Venture shall be a limited
liability company60. The total amount of investment of Cooperative Joint Venture refers
to the sum of funds necessary for reaching the production sale61. Registered capital is
total amount of capital62. Whereas the chapter IV provides for investment and
cooperation conditions. All parties to joint venture shall contribute their investment as per
administrative regulations and stipulations of Cooperative Joint Venture contract63. The
investment in cash, in kind or in other property are allowed64. The Investment made or
cooperation rendered shall be properties of Cooperative Joint Venture65. Each party is
bound to stipulate duration of investment66. The breach of contract is considered, if the
required investment as per provisions of cooperative joint venture67 is not made to
Cooperative Joint Venture. The investment of Cooperative Joint Venture are verifiable
from the accountant registered in China and thereafter certificates shall be issued. There
are certain items, which are mandatorily to be included in certificate68. Mutual transfer of
all or any rights shall be subject to consent in writing and be submitted to approval
authority who will approve or otherwise within 30 days69.
The Chapter V of legislations lays down the criteria for organizational structure.
The Board of Directors/Joint Management Committee shall be established in a
Cooperative Joint Venture, which has powers to decide on major important issues
concerning the Cooperative Joint Venture70. The BoD shall consist of three members and
shall be decided in proportion to respective shares of parties. The powers of appointment
60 See Article 14 61 See Article 15 62 See Article 16 63 See Article 17 64 See Article 18 65 See Article 19 66 See Article 20 67 See Article 21 68 See Article 22 69 See Article 23 70 See Article 24
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and replacement of directors are to be decided by parties themselves71. The tenure of
directors is three years and meeting of BoD is once a year at least and the same shall be
notified ten days prior to meeting72. Under Article 29, unanimous consent of directors
regarding decisions is required to be adopted on certain items including amendment to
articles of associations, increase or reduction of registered capital, dissolution of
cooperative Joint Venture, mortgage of assets of Cooperative Joint Venture, merger and
split of Cooperative Joint venture73. The decision and voting processes shall be detailed
in Article of Associations74. The Chairman of BoD shall be a legal person of Cooperative
Joint Venture. The Cooperative Joint Venture shall have one General Manager. The posts
of General Manager and other Senior Managers may be assumed by BoD75. The General
Manager who is incompetent shall be dismissed from job. The business operation if
entrusted with other party other than Cooperative Joint Venture, then unanimous consent
of BoD shall necessarily be obtained76.
The Chapter VI of legislation provides for purchase of materials of products.
Every Cooperative Joint Venture shall work out production or operation plans and joint
venture as a whole to decide from where to purchase materials for the joint venture. The
Cooperative Joint venture is allowed to sell their products directly in international market
without involvement of any hindrance77. According to custom clause, if goods or
materials are exempt from tax and are resold in Chinese market, the tax shall be paid. The
Cooperative Joint Venture can sell the goods at price lower or higher than the prices of
that goods in international markets78. The Chapter VII of the legislation provides for
distribution of income and recovery of investment in Cooperative Joint Venture, which
shall take an exclusive form of profit sharing on agreed basis79. On expiry of Cooperative
Joint Venture fixed assets shall belong to Chinese party and foreign party may apply for
early recovery of their investment subject always to tax law of China. No recovery shall
be affected unless the loss of Cooperative Joint Venture is recovered. The accountants’
71 See Article 25 and 26 72 See Article 27 and 28 73 See Article 29 74 See Article 30 75 See Article 31, 32 and 33 76 See Article 34 and 35 77 See Article, 36, 37 and 38 78 See Article 39 and 40 79 See Article 43
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books of Cooperative Joint Venture shall be checked by Chinese Accountants 80. The
Chapter VIII talks about duration or dissolution. According to this chapter the duration of
Cooperative Joint Venture shall be decided by all parties to Joint Venture through
consultation and shall be stipulated in Joint Venture contract and incase of extension, the
application should be filed within 180 days81. The dissolution of Cooperative Joint
Venture is in the following five ways82:-
i) Termination of duration
ii) Inability to continue operations due to financial losses.
iii) Inability to continue operations due to failure of one or more parties.
iv) Occurrence of other reason for dissolution
v) Revocation made by authorities.
The dissolution of Cooperative Joint Venture would follow liquidation procedures
as per Chinese law83. The chapter IX provides for certain special provisions as
Cooperative Joint Venture. In Cooperative Joint Venture, all parties shall be held
responsible for civil liabilities84. The Cooperative Joint Venture shall register investment
with administrative authority or industry of commerce. Any investment made by
contributing party shall exclusively belong to contributing party. The Cooperative Joint
Venture in this case establish Joint Management Committee, consisting of representative
of all parties85. This Chinese law would apply over contract of Cooperative Joint
Venture86. Certain explanations as an aid to Sino-Foreign Cooperative Joint Venture rules
were also made in the year 199687.
80 See Article 44, 45 and 46 81 See Article 47 82 See Article 48 83 See Article 49 84 See Article 50 85 See article 51, 52 and 53 86 See Article 55 87 This piece of legislation was promulgated by Ministry of Foreign Trade and Economic Cooperation on October 22, 1996.
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6) Law of the People's Republic of China on Wholly Foreign Owned Enterprise Law
This enactment was made with intent to expand foreign economic cooperation
and technological exchange and to expand Chinese national economy. The govt. of China
shall permit foreign enterprises or other organization to establish Wholly-Foreign Owned
Enterprises within Chinese territory88. Under Article 2 of the law, definition of “Wholly
Foreign-Owned Enterprises” means to be an enterprises established in Chinese
territories within provisions of capital by foreign investor89 (hereinafter referred
“WFOE”). Each WFOE must benefit the development of China’s national economy.
Preference is given to WFOE that are technologically advanced90. The investments,
profits and interests of foreign investors in China shall be protected by Chinese law. The
State shall not in any case nationalize or expropriate WFOE except only in special
circumstances, it can be expropriated only in legal way91. The application for
establishment of WFOE would be submitted to State Council Department of foreign
economic relations. The approval and examination of the application would be within 90
days. Thereafter, the Administrative Authority shall be applied for a business license
within thirty days of approval supra92. WFOE if meets the requirement of legal
personality under Chinese law shall be entitled for such status in accordance with law.
The WFOE would make its investment within time limit approved by authority. The
administrative authorities is ultimate body to carry out inspection and supervision93 and
Incase of any divisions or merger of WFOE, the same shall also be reported to
administrative authority. The operations and management of WFOE would be performed
in accordance with Article of Associations. While employing Chinese staff, a contract has
to be signed regarding employments, dismissal, remunerations, welfare, labor protection
and labor insurance with representative of workers. All labor union activities would be
permitted in accordance with Chinese law94.
88 See section 1/preamble, this law was promulgated on 31-10-2000 89 See section 2 90 See section 3 91 See section 4 and 5 92 See section 6 and 7 93 See section 8 and 9 94 See section 10,11, 12, 13
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All taxing, accounting and auditing matter would be dealt in accordance with
Chinese law, Failure of maintenance of account books, prescribed penalty would be
imposed on WFOE. All raw materials, fuel can be purchased from domestic market or
international market. The insurance is mandatory and that shall only be carried out with
insurance companies in China. The sales tax shall be deducted in accordance with
Chinese law. Foreign exchange would be regulated in accordance with Chinese law95.
Only lawful profits arising out of WFOE would be remitted abroad. The term of
operation shall be approved by administrative authority. When the WFOE is terminated,
the liquidation process to follow as well as cancellation of registration with
administrative authority96.
7) Detailed Rules for the Implementation of the Law on Wholly Foreign-Owned
Enterprises
This legislation is new shape of earlier legislation and infact was re-promulgated
on 12-04-2001 by State Council. These rules are in accordance with law of People’s
Republic of China on WFOE. The WFOE shall be subject to laws of People’s Republic
of China. All business activities would be carried out in accordance with laws of People’s
Republic of China. The establishment of WFOE is meant to promote development of
China97. The business and industry as to prohibited or restricted categories shall be
decided with state regulations of Foreign Investment Guidelines and the Guidelines
Catalogue of Foreign Investment Industries. WFOE shall have right of autonomy in its
approved scope of operations and would not be interfered98.
Under chapter II, the establishment procedures have been defined that after
approval a document of approval shall be issued to WFOE to various entities for
examination and approval subject to certain conditions enumerated therein. When
applying to establish a WFOE, related products to licenses and quotas would also be
submitted. Prior to approval shall be taken from relevant authorities99. Foreign investor
shall also provide a report from their country as to certain matter such as purpose prior to
95 See section 14, 15, 16, 17, 18 96 See section 19,20, 21, 22 97 See section 1, 2, 3 98 See section 4, 6 99 See section 7 and 8
135
setting up WFOE. The report must contain aim of enterprise, scale and scope of
operations, products to be manufactured, details of technology, conditions and amounts in
relation to water, electricity, coal, gas and other fuel requirement. The application for
WFOE shall be submitted to examining and approving authorities with certain documents
enumerated therein. These include, feasibility report, Articles of Association and a list of
legal representatives100. It is upto examination or approval authority to decide as to
whether the same shall be approved it or be rejected. Within thirty days’ time of
approval, business license is necessarily to be obtained. Thereafter, within further thirty
days registration with tax authorities and registration with administrative authority would
be applied and if in the opinion of the administrative authority, the registration is not
approved, the registration automatically becomes invalid101. All these formalities can be
done by the Chinese foreign investment enterprises services provider, which can be
appointed by WFOE on commission. The details of contents, which are to be included in
application for establishment of WFOE is prescribed in section 14 of the legislation,
whereas the Articles of Association format is given in section 15. Once the Article of
Association is approved, then the same becomes automatically affective102.
The chapter III provides for organizational structure and registered capital. The
organization of WFOE to take the form of limited liability. The foreigner investor is
liable to make investment to the proportionate of his limits of investments. The total
amount of investment shall be referred to as total account of funds required. The total
registered capital is total investment subscribed by foreign investor103. No registered
capital shall be reduced. Any mortgage or assign is subject to approval of authority104.
The chapter IV talks about investment contribution methods and period of investment.
The use of any convertible foreign currency is allowed. The foreign investor can use
machinery or equipment as investment which is only essential for use in production by
enterprise. The foreign investor can use industrial property rights or technology as
investment. After provisions, it shall belong to the foreign investor provided advance
details of this kind of property has to be provided before bringing such kind of
100 See section 9 and 10 101 See section 11 and 12 102 See section 13, 14, 15 and 16 103 See section 18, 19 and 20 104 See section 21 and 23
136
investment105.These property would be inspected by Chinese Commodity Inspection
Authority at Chinese port to ensure that the same machinery or technology is up to mark
and is latest technology and would issue an inspection certificate. Incase of difference,
the authority shall prescribe a time to rectify the mistake. The time of investment shall be
mentioned in the application of WFOE. The foreign investor is permitted to pay its
investment in installments106. The extension of time limit to pay investment is
permissible on the application at the time of expiry of prescribed schedule.
The Chapter V specifies land use and its related fee. The land for WFOE to be
arranged by local people’s government. After establishment, within thirty days the
WFOE would submit document of approval with land management department. The
allotted land is legal right of WFOE and cannot be transferred without authorization. The
fee of allocated land is prescribed under Article 36107. If land is developed, WFOE shall
pay development fee and incase of undeveloped land, both govt. and WFOE shall arrange
infrastructure and construction. The land fees would only be charged in accordance with
Chinese regulations. The land use is same as that of period of operations. In addition,
WFOE is also entitled to obtain land use rights in accordance with Chinese laws and
regulations108. The chapter VI relates to purchasing and selling. The WFOE shall have
the right to purchase items and in this regard the same treatment would be given to
WFOE as applies to Chinese enterprise. The finished products is permitted to be sold out
in Chinese domestic markets. However, the state also encourages export of these goods to
international markets. The WFOE is given a right to export its products in international
market. So far as the import of goods by WFOE is concerned, the license has to be
obtained from the concerned department in China for which the WFOE shall provide
statistics regarding purported imports109. The taxes of WFOE would be chargeable as per
provisions of Chinese law so also the income tax is also applicable in accordance with
Chinese Law. However, certain exemptions are provided on a categories of imported
105 See section 25, 26 and 27 106 See section 28, 29, 30 and 31 107 See section 33, 34, 35 and 36 108 See section 37, 38, 39, 40 and 41 109 See section 42, 43, 44, 45 and 47
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commodities enumerated therein. Under the legislation there are certain other export
exemptions on some of products, which are provided to the WFOE110.
The foreign exchange of WFOE is to be dealt in accordance with Chinese Laws.
The separate foreign exchange account be opened and foreign exchange income of
WFOE be deposited in it. Whereas any WFOE is desirous to operate account for business
requirement then the approval is necessarily to be obtained from the relevant authority.
The legislation further outlines the mandatory requirement of deduction of income of
employees, thereafter, the balance therefrom can be remitted abroad111. The chapter IX of
the legislation provides for financial affairs and accounting affairs of the WFOE. The
financial affairs of the WFOE shall always be carried out in accordance with Chinese
laws and fiscal year is to start from 1st January to 31st December. The separate reserve
fund has to be created for meeting out employees bonus and welfare funds be paid after
payment of income tax. The voucher or accounts books must be in Chinese so also the
accounting statements or liquidation statement is to be drawn in accordance with
provisions of Chinese finance and taxation authorities. The accounts of WFOE shall be
examined by Chinese or overseas accountant. Incase of any violation of above provisions,
finance and taxation authority may impose a fine112.
The chapter X of the law provides for employees and Chapter XI talks about trade
union. The labor contract between WFOE and employees shall be in accordance with
China law. The legislation strictly prohibits child labor in WFOE. The WFOE would
provide occupational and technical training to all employees at their cost. All employees
of WFOE have a right to establish Trade Union in accordance with laws of China. Such
trade union has a right of representative on behalf of employees in signing labor contract.
The prime duties of trade union is to protect the legal rights and interests of employees
given under the Chinese law. The trade union to act as non-voting member of the meeting
that intends to discuss and decide issue of employees. The WFOE shall support the work
110 See section 48,49,50 and 51 111 See section 52,53,54 and 55 112 See section 56,57,58,59,60, 61 and 63
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of the enterprise and it shall allocate funds of 2% of total actual wages as trade union
funds are to be regulated by All Chinese Federation of Trade unions113.
The chapter XII stipulates clauses with respect to termination or liquidation
processes. The duration and terms of operations shall be proposed in the enterprise
establishment. The terms of operation shall be calculated from issuance of business
license. The extension of term can be applied with approval authority and it is upto their
discretion to approve or disapprove it114. The operations of WFOE may be terminated in
any following instances specified therein the clause. Such termination shall be within
fifteens of the date thereof after making public announcement and thereafter determine
procedure and principles for their liquidation. The members of liquidation committee
includes representatives of its creditors, members of relevant authorities, accountants and
lawyer registered in China. The rights and functions of liquidation committee are
predetermined in this section. Unless the entire liquidation procedures is not completed,
no proceeds can be remitted by foreign investors abroad. On completion of liquidation,
WFOE starts the procedures of surrendering its registration and business license115.
Under the process of liquidation, Chinese enterprises shall have a priority right of
purchase. It is obligatory that the items of insurance ought to be with insurance company
in territory of China. The contract law of China would apply on agreement/contract by
WFOE with other companies116.
8) Measures on Liquidation Procedures for Foreign Investment Enterprises
These rules are made for smooth progress of liquidation process of foreign funded
enterprises (hereinafter referred to “FFEs”). Another aspect of legislation was to protect
the rights and interests of the creditors and investors. These rules are applicable on
liquidation of Sino Foreign Equity and Contractual Joint Ventures and Wholly Foreign
Owned Enterprises. If any enterprise which has been declared bankrupt shall be handled
in line with relevant laws on liquidation of bankruptcy117. This enactment is intended to
articulate the procedure of liquidation of any FFEs. The liquidation Committee may
113 See section, 64, 65,66,67,68 and 69 114 See section 70 and 71 115 See section 72,73,74,75,76 and 77 116 See section 80 and 81 117 See section 1 and 2
139
proceed with liquidation process in accordance with stipulations on the general
liquidation of this set of rules and if FFEs are incompetent to do so may apply to
department examination and approval for special liquidation if approved, the liquidation
process would be carried out in accordance with these rules. The principles of
reasonableness and fairness shall be adopted for liquidation as to non-prejudicial interests
of enterprises, investors and creditors. The liquidation would only be on approved
contracts and articles of association118. The chapter II provides for general liquidation.
The liquidation would start on expiry of operation of any FFEs. The duration of a
liquidation cannot exceed 180 days from the date of start of liquidation. The extension
can be applied to authority within fifteen days prior to expiry of liquidation duration. The
FFEs shall not engage in any new business activities during the duration of liquidation119.
The power organ of FFE should organize a liquidation committee within 15 days. The
liquidation committee should comprise of at least three people amongst the members of
the organ. The change of members of liquidation committee in the following cases during
liquidation process 1) members violate laws, 2) creditors ask to change under just
reasons, and 3) the members dies or loses ability to act.
The powers of liquidation committee is also comprehensively stated in further
part of legislation. The balance sheet, list of property and property evaluation shall be
reported to the authority. Once liquidation committee is set up, the entire details of staff,
creditors and debtors would be handed over by enterprises to liquidation committee120.
The impartiality of liquidation committee is to be ensured. During liquidation process,
meeting can be attended by representatives of FFE examination and approving
department. Within seven days of its constitution, the enterprise should notify the
examination and approval department of FFE. The liquidation committee shall also notify
the known creditors within ten days of its constitution. A liquidation announcement of
WFOE shall also be made and within thirty days the creditors shall report to liquidation
Committee121. The report of creditors shall be submitted with amount and certificate
118 See section 3 and 4 119 See section 5, 6 and 7 120 See section 8, 9, 10, 11, 12 and 13 121 See section 14, 15, 16, 17 and 18
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within set terms. The claims of creditors are also prioritized according to this section122.
The liquidation committee is competent to receive as many claims as possible and
thereafter, register them under the rules123. The objections, if any on the claims shall be
filed within fifteen days. For property gains and losses during liquidation process, the
liquidation committee should provide written explanation. The priority clause in
payments for the liquidation property is detailed in the legislation. All creditors with
guaranteed credits shall have priority first. All payments for the expenses are made first,
thereafter, the repayments should be in order of i) employees’ wages and labor insurance
fee, ii) state taxes and 3) other debt. The restrictions on payments of liquidation expenses
and debts surplus and thereafter properties shall be distributed according to actual
investment percentage subject to stipulations by laws and AOA. If FFEs properties are
not able to make up payments for debts, then liquidation Committee would apply to
people’s court for bankruptcy proceedings.
Certain restrictions are also provided therein on actions of FFE within 180 days
from the date of starting liquidation124. The pricing of liquidation properties shall be as
per stipulation of contracts and Article of Associations. Incase of auction/sale, investors
of FFEs have priority over other people. After completion of process, liquidation
committee shall prepare report. The Liquidation Committee report after completion be
sent to Examining and Approving Department125. After registration within thirty days
therefrom of liquidation process, the registration with taxation department be cancelled.
Upon termination of liquidation, the accounts books shall also be handed over to Chinese
partner of Sino Overseas and Contractual Venture. Special liquidation is detailed in
legislation, where enterprises is ordered to be shut down by law. For special liquidation,
the special liquidation committee shall be constituted126. The head of liquidation
committee to be appointed by examining department of FFEs. The liquidation committee
would call meeting of enterprises and their power organs for creditors to discuss details
of liquidation. All creditors shall be entitled for participation and voting. The liquidation
122 See section 19 123 See section 20 124 See section 26, 27 and 28 125 See section 29, 30, 31 and 32 126 See section 33, 34, 35 and 36
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committee is responsible for calling up creditors127. The legal liabilities are included in
section 44 to 50 of the legislation. These provisions relate to violation of procedure of the
regulations and defines different categories of fines/penalty that can be imposed.
9) Provisions for the Alteration of investor’s equities in foreign funded enterprises
This enactment was promulgated on 28-05-1997 in pursuant to the company law
of Peoples Republic of China i.e.the law of PRC on Sino-Foreign Equity Joint Venture,
the law on Contractual Joint Ventures, Law on Foreign funded Enterprises and other laws
of PRC to promote healthy foreign funded enterprises and to protect legitimate rights of
investors128. The definition clause129 of the enactment defines alteration of investors,
which means equities in these regulations and would also include following: -
a) Agreed transfer of equities
b) Transfer of equities
c) Transfer of equities to other enterprises
d) Alteration due to readjustment
e) Ownership of equities by pledgee or beneficiaries
f) Ownership of equities by inheritors
g) Inheritance of equities of initial investors
h) Alterations of investors incase of an investor to perform
The alteration of equities shall be in accordance with Chinese law and be
approved by authority. These alterations should be in accordance with Industrial policies
of China as well, provided such alterations shall not take/hold a leading position. In all
means, alterations shall not take less than 25%130. With consent of other investors, the
investors who has paid up its share can pledge the equities. During the period of pledge,
the status of the pledger shall not change. “The concerned department to examine” means
examination and approval department and incase of restricted alterations under section 5,
then Ministry of Foreign Trade and Economic Cooperation of PRC. Section 8 provides
127 See section 37, 38, 39 and 40 128 See section 1, which is preamble. The intention of legislature to promulgate this legislation was to protect the rights of investors and their investments. This piece of legislation consists of 21 sections and can be considered as a special legislation notwithstanding the provisions of other laws mentioned in preamble. 129 See section 2 definition clause 130 See section 3, 4 and 5
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for alteration of equities incase of Chinese investors. These alteration should contain a list
of documents to be mandatorily be appended with the application and be submitted to
Examination and Approval department131. Agreement on the transfer includes following
contents. After signing pledging contracts with pledgees, the investor shall submit
specified document to examination and approval department and this department would
accord approval or disapproval within thirty days. The original document certifying
ownership of equities by enterprise be also submitted to the department132. Incase
Chinese investors intends to alter its equities, the enterprise shall submit specified
documents as per section 16 of the legislation. Thereafter, the examination and approval
department is bound to give approval or disapproval within thirty days. The alteration of
equities be entered into alteration register with registration department. The relevant
document are also submitted to examination and approval department133. The agreement
in alteration of equities shall take effect on the date of issuance of altered certificate.
These provisions would also apply to transfer of unlisted shares of foreign funded limited
liabilities company134.
10) Interim provisions for submission and approval procedures on electric power
project invested directly by foreigners
These provisions are promulgated on 09-12-1997 with the purpose of securing
electric industry. The projects of foreign business shall be in conformity with National
Enterprise Policy and be placed into five year plan or ten year plan. These provisions are
also applicable on other territories of PRC not part of China135. These provisions are only
applicable to electric power projects invested by Chinese Foreign Owned Enterprises.
Nuclear projects must be in conformity with provisions of submission and approval of
front end engineering136. The chapter II of the law provides for procedures of submission
and approval on these projects. After submission of project, the feasibility report has to
be applied for. The project would be examined by province level Electric Administrative
Department agreed by Ministry of Electric Power. Feasibility study must contain
131 See section 6, 7, 8 and 9 132 See section 10, 12 and 13 133 See section 16, 17, 18, 19 134 See section 20 and 21 135 See section 1, 2 and 3 136 See section 6
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specified field details as specified in this legislation, thereafter, Chinese Foreign Joint
Venture would be applied for137. Once the feasibility is ratified officially, it is reported to
Ministry of Electric Industry. The chapter III provides for procedure of submission and
approval on solely foreign owned enterprise. The chapter IV details supplementary
provisions. Appendix to the legislation contains basic requirements of main application
files138.
11) Rules on procedures for examination and approval of foreign investments on
inventory assets
This law was enacted on 09-12-1997 in order to standardize the procedures of
examination and approval of foreign investment and their inventory assets in power
industry. The National Electricity Enterprises should apply to Ministry of Electric Power
Industry. Once an application is approved, the enterprise shall make a letter of
proposition to the Ministry of Electric Power Industry on Joint venture project. The
proposition would include specified items. Once approved, the enterprise can apply for
assets appraisement with examination and approval department as per criteria detailed
therein139, thereafter, the feasibility study report of the joint venture be composed as per
specified criteria. Then, the enterprise shall apply for building jointly owned enterprises.
These provisions are applicable for electric department utilizing stock capital to absorb
foreign capital projects140.
12) Detailed Rules of the Ministry of Foreign Trade and Economic Cooperation
(MOFTEC) an approval and control of Resident Representative Offices of
Foreign Enterprises.
The main purpose141 for promulgation of these rules are to promote China’s
foreign trade and international economic and technical cooperation and to look over the
resident representative offices of foreign firms established under “Interim provisions of
the State Council of PRC for the Control of Resident Representative offices of the
137 See section 12 138 See chapter III of the legislation 139 See section 3 and 3.1 140 See section 4 141 See section 1
144
Foreign Enterprises”. These rules are considered as an aid to later provisions. These rules
are exclusively applicable on resident representative offices within China. The foreign
enterprises prior to setting up their resident representative offices must obtain approval of
MOFTEC. The detail of business by resident representative offices i.e. no-direct business
activities within their business scope. Without approval, no business activity of resident
representative offices is permissible142. After approval, resident representative offices are
protected by laws of PRC. The basic requirements for setting up resident representative
offices are detailed in section 8143. The chapter II provides for establishment, extension,
change and termination of representative offices. The application has to be filed for
setting up offices within 30 days. The detail requirement of materials for registration are
also provided. The name of resident representative office include “Country + Enterprise
Name + City Name + Representative Office”. After approval, chief representative would
collect the letter of approval. Thereafter, other formalities with public security, taxation,
customs and banking institutions would be followed144. The longest term of approval is
three years and extension to be applied in advance within 30 days. For extension, certain
documents are appended with application which is prescribed in the section 17 of the
legislation. After extension is approved, a certificate of approval is given145. The change
of name is prescribed on application with certain documents. The cancellation of
registration procedure is also prescribed on application by foreign enterprise. The
application must be in Chinese language146.
The chapter III provides for administration of resident representative offices.
Inspection of resident representative offices shall be carried out by MOFTEC. All
materials including importing exhibits be applied with approving department. The foreign
enterprise bears all legal responsibilities. The numbers of foreign resident representative
office be supplied in January and July every year147. The qualification of Chief
Representative and representatives are mentioned in Chapter IV of the legislation. Both
foreign nationals and Chinese nationals of long term residence in foreign countries are
142 See section 2, 3, 4 and 5 143 See section 7 and 8 144 See section 9, 12, 13, 14 and 15 145 See section 16, 17 and 18 146 See section 19, 20 and 21 147 See section 23, 25, 26 and 27
145
eligible to be Chief Representatives or Representatives148. All foreign enterprises are
bound to follow these rules. The matters not covered under the legislation are to be dealt
with laws and regulations of People’s Republic of China. These rules are to be interpreted
by MOFTEC of People Republic of China149.
13) Provisional Regulations governing Investment within the Territory by Foreign
Investment Enterprises
Under section 2 of the enactment, the definition of investment within territory of
FIEs are provided. It means activities of establishing enterprises through investment or
purchasing equity interests of investors of other enterprises. Any FIE that intends to
invest within territory shall abide by laws and regulations of the State and such
investment shall be governed by regulations of Provisional Regulations on Foreign
Investment Guidelines and the Guidelines Catalogue of Foreign Investment Industries.
Invested company shall be a limited liability company or Joint Stock Limited
Company150. The pre-requisites for FIEs, unless conditions specified therein are not met,
the FIEs cannot invest. These includes their registered capital has been fully paid in,
commencing to make profits, conducting business in accordance with law and not having
illegal operations. All investment by FIE shall not exceed 50% of its own net assets. The
FIEs would apply to registration authority where invested company is located with
certain documents enumerated therein. It is upto registration authority to decide fate of
registration of investment151.
Incase of restricted category of area, the competent authority is foreign trade and
economy at the provincial level to decide the application. The competent authority at
provincial level may ask for opinion of administrative department or industry on which
such department would issue a written approval. FIE incase of approval would then apply
to registration authority and if registration is permitted, then “Marked Business License”
is issued152. Within thirty days of establishment of invested company, the FIE shall file
certain documents with approval authority. Any change or modification in fixed assets or
148 See Chapter IV 149 See section 30, 31 and 33 150 See section 2, 3 and 4 151 See section 5, 6, 7 and 8 152 See section 9, 10, and 11
146
business scale has to be applied with authority and the same would give a reply within
fifteen days, if it is not given, then consent shall be deemed given. If FIE intends to
purchase equity interests of the investors of the invested company, then the same
procedure would be followed153.
14) Provisional Regulations on the Establishment of Foreign Funded Joint Stock
Companies Ltd
This enactment was legislated by Foreign Trade and Economic Cooperation.
Through these regulations, foreign companies’ enterprises and other entities are allowed
jointly to set up “Foreign Funded Joint Stock Companies Ltd” jointly with Chinese
companies. These regulations are applicable only on “Foreign Funded Joint Stock
Companies Ltd” established under the regulations. The company shall be a form of
“Foreign Funded Enterprises” (hereinafter referred to as “FFEs”). After formation, these
companies are required to comply with state related laws and regulations. The companies
can also be established either through promoters or public offer154. The registered capital
of company shall be total capital stock registered with registering department. The
transfer of shares is permissible only after 3 years of registration. One of the promoter
can be entrusted to proceed with application procedures and all applications ought to be
in Chinese Language155. The applications shall contain detailed items mentioned in the
legislation. The promoter’s agreement shall include detailed items mentioned therein.
Within thirty days of registration, the company shall open a special bank account. The
companies through promoters after paying value of the subscription of shares shall
establish a board of directors and board of supervisors. Other companies like Sino
Foreign Enterprise etc. before submitting application should submit profit making records
for last consecutives three years156. The company after payment of value and approval
can undergo transformation formalities with responsible department and thereafter they
shall inherit all the legal rights and obligations of original foreign funded enterprise. The
requirements/items of transformation are also provided. After transformation as per
section 16, the company would have to undergo another transformation with MOFTEC
153 See section 12, 13 and 15 154 See section 1, 2, 3, 4 and 5 155 See section 7, 8, 9 and 10 156 See section 11, 12, 13, 14 and 15
147
and shall also meet requirements mentioned in section 20 of the legislation. Other articles
related to transfer of shares and their requirement are provided in subsequent sections157.
15) Several regulations regarding the change of ownership interest of the investors
in Foreign Investment Enterprises
This law was promulgated on 28-05-1997 by Ministry of Foreign Trade and
Economic Cooperation and state Administration for Industry and Commerce158. Section 1
provides for the purpose of the legislation. It says that the regulations are meant for
promotion of the healthy development of foreign investment enterprises, protection of the
legitimate rights and interest of each of the investors and maintain social and economic
order. The change of ownership interest means change in the investor or the percentage
of the investor’s investment in ownership assignments of ownership interest, assignment
of ownership interest as collateral security, obtaining the ownership interest by successor,
creditors, the succession of ownership interest or replacement of an investor. The investor
must observe the relevant laws and regulations of China159. The change of ownership
interest of the investors shall not result in a situation where foreign investors or non-
Chinese state owned enterprise becomes the majority shareholder in the leading position.
The change of ownership interest of the investors shall not result in a situation where
percentage of investment by foreign investor is lower than 25% of the registered capital
of Enterprises. Investor can affect change of ownership through pledge contract. The
authority to examine and approve is the examination and approval authority of
establishment of such enterprises160. A list of document are provided in the section 9. All
ingredients to be mentioned in the interest transfer agreements. After examination of
pledge contract, certain documents are submitted for review. The examination and
approval authority within thirty days’ time to decide whether or not approve the
documents. Thereafter, within further thirty days’ time, it shall grant approval of the
change of ownership interest of the enterprises. The enterprises shall within 30 days upon
157 See section 16, 17 and 19 158 See promulgation clause 159 See section 1, 2 and 3 160 See section 4, 5, 6 and 7
148
the fate of application would apply to registration authority for change of registration in
accordance with law161.
16) The Law of the People’s Republic of China on Chinese Foreign Joint Ventures
This law was promulgated on 15-03-2001. The preamble says that it was enacted
with a view to expand international economic cooperation and technical exchange.
People Republic of China allows the foreign companies to join with Chinese companies
to establish Joint Venture subject to approval by Chinese govt. in accordance with
Chinese laws. The rights and profits in joint venture are equally shared under the
legislation. The state shall not nationalize or take over joint ventures except under special
circumstances only in accordance with needs of social public interest. The required
documents of Joint venture shall be submitted to competent Foreign Economic and Trade
Department of the state for examination or approval, which shall be decided within three
months. The Joint Venture shall be a limited liability company. The proportion of
investment should not generally be less than 25%. Each party is at liberty to make
investment in cash, in kind or through industrial rights, the technology or equipment must
be of advance technology as per country’s need162. A joint venture shall be governed by
Board of Directors, whose composition should be stipulated in contract or in Articles of
Association. The Board of Directors are empowered in accordance with provisions of
Article of Association to discuss or decide all major problems of joint venture. The staff
and workers are allowed to form trade union in joint venture in accordance with national
law. The net profit would be distributed to parties after necessary deductions towards
reserve funds, a bonus and welfare fund, after payment of salaries of staff and workers
and a venture expansion fund163. A joint venture shall open a foreign exchange account
with an approved bank in China. For raw and processed materials and fuels, a joint
venture are permitted to make the purchases from Chinese market or from the
international market. The net profit or funds at the time of Schedules expiration or early
termination may be remitted in accordance with foreign exchange regulations. The
wages, salaries or other income earned by foreign staffs shall be remitted in accordance
161 See section 9, 10, 12, 17 and 18 162 See section 1, 2, 3, 4 and 5 163 See section 6, 7 and 8
149
with foreign exchange regulations. The contract period shall be decided by parties after
consultations. Incase of heavy losses, the contract would be terminated through
consultation. The disputes if not settled through consultation shall be settled through
mediation or arbitration164.
17) Administrative Regulations on Foreign Invested Telecommunication Enterprises
This law was promulgated on 05-12-2001 and is made effective from 01-01-2002.
The basic purpose of the legislation to meet the needs of local industry by opening the
local telecommunication industry to the outside world in telecommunications industry
and promote the development of telecommunications industry165. The Foreign Invested
Enterprise means enterprises duly invested and established to engage in
telecommunications business166. Foreign Invested Enterprises engaging into
telecommunication business shall abide by telecommunication laws of People Republic
of China. The business is only restricted to specific business classification. The registered
capital is specified in section 5 of the legislation167. The shareholding of foreign investor
shall not exceed 49%. The major Chinese investor shall satisfy the conditions enumerated
therein section 8. The major foreign investor shall satisfy the conditions enumerated
therein section 9. For establishment of a foreign invested telecommunications enterprises
in any province or autonomous region, the specified category of documents are to be
appended with application168. Where major Chinese investors is applying for
establishment, the documents shall be as per this section169. For establishment of Foreign
Invested Enterprises under the Central Govt., the list of documents shall be submitted by
major Chinese investor170. The specification of project proposal for establishment for
foreign invested telecommunication enterprises must be made in terms of section 14 of
the legislation171. The operating permit for telecommunications business is to be obtained
from department Incharge of information telecommunications industry only after
completion of procedures. The cross border telecommunication enterprises carrying on
164 See section, 9, 10, 11, 12, 13, 14 and 15 165 See section 1 166 See section 2 167 See section 3, 4 and 5 168 See section 6, 8, 9 and 11 169 See section 12 170 See section 13 171 See section 14
150
business shall be subject to approval of Department of Information Telecommunication
Industry. A penalty clause in case of violations of section 6 hereinabove shall be imposed
from RMB 100,00 to RMB 500,000172. In respect of violations of section 18, a fine of
RMB 200,000 to RMB 1,000,000 shall be imposed. Where it is proved that the approval
is through fraudulent methods, the approval would be rendered invalid by Incharge of
Information Telecommunications industry and a fine of RMB 200,000 to RMB 1,000,000
would be imposed. Where enterprises violates telecommunication laws of People of
Republic of China during its operation, penalties shall be imposed by the relevant
authorities. Where enterprises intends to go listed, it shall seek approval and examination
according to relevant state stipulations173.
3.3 FDI REGULATORS IN CHINA
In order to regulate foreign investment, countries around the world set up
regulators to keep control and provide assistance to foreign investors to work smoothly.
The core functions of FDI regulators is to provide assistance to foreign investors and one
window operations to facilitate inflows of investment. Most of countries focus on
smoothening the functions of regulators so that confidence of foreign investor are won
over. Like all other countries, the foreign investment in Peoples Republic of China is also
being looked after by a number of agencies. It would not be wrong to say that most of
tremendous growth Peoples Republic of China has achieved is just because of role of
foreign investment agencies. Most common of them are as under:-
i) China investment promotion agency
China Investment promotion Agency (hereinafter referred to as CIPA) is the premier
investment promotion agency of Peoples Republic of China. It controls both inbound and
outbound investment. The basic purpose of CIPA is to assist and to work in line with
China’s economic planning. It also liase with International Economic Organization,
foreign promotion agencies, International Chamber of Commerce and business
associations on behalf of the Ministry of Commerce of Peoples Republic of China (The
172 See section 17, 18 and 19 173 See section 20, 21, 22 and 23
151
Wikipedia, 2015)174. It is basically an internal department of Ministry of Commerce. Its
functions amongst other are as follows:-
1) Organizing and implementing the foreign investment promotion planning
2) Guiding and involving in the Federation of investment promotion agencies of
China
3) Supervising the work of investment promotion agencies of different areas
4) Attending the conferences of world associations of investment promotion
agencies (WAIPA) on behalf of Ministry of Commerce
5) Engaging in cooperation and Communication with relevant International
Economic Organization, foreign investment promotion agencies, Chamber of
Commerce and business association
6) Organizing and implementing activities of bilateral and multilateral investment
promotion agencies
7) Implementing the annual investment promotion programs of Ministry of
Commerce
8) Carrying out topic research related to investment
9) Editing and printing publicized material and relevant investment promotion
publications
10) Work as an Incharge of the daily operation of website (Invest in China)
11) Offering relevant investment information of domestic and international
enterprises
12) Accepting and handling complaints from investment enterprises of trans-
provinces, trans-cities, trans-regions and trans-industries
13) Planning and organizing large investment promotion activities at home and
abroad, organizing relevant investment activities such as training, forum,
conference and exhibitions
14) Operating website of Invest in China
15) Carrying out business cooperation for commercialization and specialization of
investment promotion
174 The Wikipedia. Free Encyclopedia. (2015, Oct, 26). China investment Promotion Agency. Retrieved from The Wikipedia website: https://en.wikipedia.org/wiki/China_Investment_Promotion_Agency
152
16) Dealing with consultation, information service, market investigation, credit
investigation related to investment activities and planning services on investment
promotion
17) Assisting foreign investment enterprises for relevant legal procedures
All above functions are performed by the Chinese Investment Promotion Agency through
sub department and offices. The precise list is as follows:-
1) General Office of China International Fair to Investment and Trade (CIFIT)
2) Investment Promotion Planning and Service Center
3) Foreign Investment Cooperation Department
4) Training Department
5) Special Projects Development Department
6) Liaison Department
7) Information Consulting Department
8) Conference and Fairs Department
9) Business Development Department
10) Survey and research department
11) Financial Department
12) Administration Department
The following sub national agencies also fell under the supervision of Chinese
Investment Promotion Agency. In another words, the following sub national agencies are
integral part of Chinese Promotion Agency.
i) Anhui Provincial Foreign Investment Promotion Center (AIPC)
ii) Beijing International Investment Promotion Council
iii) Xiamen International Promotion Center
iv) Chanquin Promotion and Service Center for Foreign Investment
v) Dongquan Foreign Investment Promotion Center
vi) Fujian Foreign Investment Service Center
vii) Guangzhou Municipal Board of International Investment
viii) Harbin Economic Cooperation and Promotion Bureau
153
ix) Jilin Provincial Foreign Investment Information Network
x) Liaoning International Investment Promotion Center
xi) Ningbao Foreign Investment Promotion Center
xii) Shanghai Foreign Investment Development Board (FID)
xiii) Shanghai Foreign Investment service Center
xiv) Chenzhen Municipal Foreign Investment Bureau
ii) China Council for the Promotion of International Trade
China Council for the Promotion of International Trade is also known as China
Chamber of International Commerce-CCOIC, which name was adopted in the year 1988.
It was most premier and renowned organization established in 1952 by Govt. People’s
Republic of China. In 1994, it joined the International Chamber of Commerce. The basic
purpose of “CCOIC” is to develop business coordination with foreign economies of
world (The Wikipedia, 2015)175. It consists of entrepreneurs, companies, corporations
and enterprises representing the relevant economic areas of China. It is one of largest and
biggest govt. organization meant for the promotion of International Trade in China (The
Biz China Now, 2015)176. The website of “CCOIC” defines the aims and purposes for
establishment of this institution, which includes promotion of foreign trade, usage of FDI,
introduction of advanced foreign technologies, supervisions of Sin-Foreign Economic
relations in various forms, promotion of trade links between economies of China and
other regions of world and promotion of harmony, understanding friendship amongst
China and people of all nationalities of world. Its membership are allowed to all
corporations/enterprises established in China. They also provided legal assistance to its
members. The CCOIC is providing interalia following services: -
1) Country Level Branches
2) Industrial Sub-Councils
3) Provincial Sub-Councils
4) Exhibitions
175 The Wikipedia. Free Encyclopedia. (2015, Oct, 30). China Council for the Promotion of International Trade. Retrieved from The Wikipedia Website: https://en.wikipedia.org/wiki/China_Council_for_the_Promotion_of_International_Trade 176 The Biz China Now. (2015, Oct 30). CCOIC. Retrieved from The Biz China Now website: http://bizchinanow.com/aboutccpit/ aboutccpit.htm.
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5) Patent and Trademark
6) China Maritimes Arbitration
7) China International Economic and Trade Arbitration Commission
8) Introduction to Department of Legal Affairs
CCPIT has established industrial sub-councils divided into sector wise as per
economic need of China. These sub-council are divided into following (The Biz China
Now, 2015)177:-
a) CCPIT Machinery
b) CCPIT Electronics
c) CCPIT Light Industry
d) CCPIT Textiles
e) CCPIT Agriculture
f) CCPIT Automotive
g) CCPIT Petrochemicals
h) CCPIT Commerce
i) CCPIT Metallurgy
j) CCPIT Aviation
k) CCPIT Aerospace
l) CCPIT chemicals
m) CCPIT Building Materials
n) CCPIT Universal Industry
o) CCPIT construction
p) CCPIT Supplies and Marketing cooperation
q) CCPIT Grain business
r) CCPIT Coals
s) CCPIT Mining
t) CCPIT Logistics
177 The Biz China Now. (2015, Oct 30). CCOIC. Retrieved from The Biz China Now website: http://bizchinanow.com/Contents/ Channel_1847/2006/0530/301098/content_301098.htm
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Further, there is list of provincial sub-councils of “CCPIT” in different province
of the China. CCPIT works through these provincial sub-council to make outreach to
foreign investors professionally. The province wise sub-councils (The Biz China
Now, 2015)178 are given below: -
1) CCPIT Beijing
2) CCPIT Tianjin
3) CCPIT Hebei
4) CCPIT Shanxi
5) CCPIT Inner Mongolia
6) CCPIT Liaoning
7) CCPIT Shenyang
8) CCPIT Dalian
9) CCPIT Jilin
10) CCPIT Changchun
11) CCPIT Heiloongjian
12) CCPIT Haerbin
13) CCPIT Shanghai
14) CCPIT Jiangsu
15) CCPIT Nanjing
16) CCPIT Zhejian
17) CCPIT Hangzhou
18) CCPIT Ningbo
19) CCPIT Anhui
20) CCPIT Fujian
21) CCPIT Xiamen
22) CCPIT Jinanxi
23) CCPIT Shandong
24) CCPIT Jinan
25) CCPIT Qingdao
178 The Biz China Now. (2015, Oct 30). CCOIC. Retrieved from The Biz China Now website: http://bizchinanow.com/Contents/ Channel_1847/2006/0530/301097/content_301097.htm
156
26) CCPIT Henan
27) CCPIT Hubei
28) CCPIT Wuhan
29) CCPIT Hunan
30) CCPIT Guangdong
31) CCPIT Guangzhou
32) CCPIT Zhuhai
33) CCPIT Shantou
34) CCPIT Shenzhen
35) CCPIT Guangxi
36) CCPIT Hainan
37) CCPIT Chongqing
38) CCPIT Gansu
39) CCPIT Qinghai
40) CCPIT Ningxia
41) CCPIT Xinjian
The exhibitions sector is fully organized sector of “CCPIT”. It is being looked
after by the subsidiary of “China Council for the Promotion of International Trade” and
“the China Chamber of International Commerce (CCOIC)”, which is known as “China
International Exhibition Center Group Corporation (CIEC) (The Biz China Now,
2015)179”. It presides over China Association for Exhibitions Centers. It was formed in
1985, since then it emerged as comprehensive exhibitions enterprises and is responsible
for wide range of organizations, overseas exhibitions and related exhibitions services.
Another sector is provisions of services related to patent trademark. For these
services, a separate law office has been established by “CCPIT”. It has 237 trademark
and patent attorneys and out them sixty-six are qualified as attorney at law. They provide
services on wide range of Intellectual properties issues such as prosecution, mediations,
litigation with regard to patents, trademarks, copyrights, domain names, trade secrets and
179 The Biz China Now. (2015, Oct 30). CCOIC. Retrieved from The Biz China Now website:http://bizchinanow.com/Contents/ Channel_1847/2007/0828/60515/content_60515.htm
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other Intellectual Properties matters. They represent every sector of industry and
commerce from their beginning to becoming multinationals. Their professionals are
provided continuous professional training and education to keep them abreast with latest
development of technologies and laws. This department was established in the year 1957,
where a trademark agency was established within “China Council for the Promotion of
International Trade”, Trade promotion body to represent foreign companies before
Chinese authorities. This agency was the only trademark related agency in PRC until
1980. In early eighties, when development of patent system was felt in China, then
“CCPIT” organized the patent agency of China. This patent agency was authorized as the
first Chinese intellectual property law firm to have cross border representation. These two
agencies were merged into one and was given the name of “CCPIT Patent and Trademark
Law Office” in 1993. This law firm provides services on following three items:-
CCPIT PATENT AND TRADEMARK LAW OFFICE
PATENT SERVICES TRADEMARK SERVICES OTHER SERVICES
Framing patent strategy Trademark and its registration Copyrights
Advisory services relating to patenting the inventions before patent application
Filing and prosecution trademark application for prosecuting
trademark worldwide
Computer software and their registrations
Searching for patent analysis
Enforcement of trademarks through administrative and
judicial channels
Domain name registration
“invalidating patent” Advising on anti-counterfeiting measures Domain name disputes
Analysis of patent infringement
Negotiations for solutions of Trademark
Layout designs of integrated circuit
Enforcing patent rights through court of law Filing oppositions Intellectual properties
right with custom
Licensing and transferring patents
Helping with license and assignment of trademarks
implications
Advisory services on trade secret, trade
dress and anti-unfair competition issues
Payment of annuities of patent
Providing trademark searching, watching and advertising services
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iii) Ministry of Commerce of the People's Republic of China
Ministry of Commerce of China is prime govt. Agency created to look after the
affairs of international trade, import and export activities, global investment coming into
China and other allied areas of economy. Its roots started from 1949 in the form of
Ministry of Trade. After three years, it was converted into Ministry of Foreign Trade. In
1982, it was included with Ministry of Foreign Economic Liaison, the Sate Import and
Export Regulation Commission and the State Foreign Investment Regulations
Commission. After re-vamp in 1993, it was named as current Ministry of Foreign Trade
and Economic Cooperation. Finally in 2003, it was renamed Ministry of Commerce (The
Wikipedia, 2015)180.
As per official’s website of Ministry, it listed various functions relating to
international trade of PRC. It says that the Ministry is responsible for formulation of
policies of intentional economic linkage between other countries with China. The drafting
of local and global investment and trade laws of PRC. It can also legislate on outward
global investment and inter countries economic cooperation. Its tasks also include
bringing existing laws of PRC in accord with bilateral investment, treaties of China. It
also performs functions for advancement of industries, enterprises and furtherance of
commercial and trade services. The Ministry also liases with other ministries and
commission for development of outsourcing and export services (Ministry of Commerce,
China, 2016)181. The mission statement as per their website is as under:-
1. To formulate the strategies, guidelines and policies of developing domestic and foreign trade and international economic cooperation, draft the laws and regulations governing domestic and foreign trade, foreign investment in China, foreign assistance, overseas investment and foreign economic cooperation, devise relevant departmental rules and regulations. To study and put forward proposals on harmonizing domestic legislations on trade and economic affairs as well as bringing Chinese economic and trade laws into conformity with multilateral and bilateral treaties and agreements. To study the development trends of economic globalization, regional economic cooperation and modern distribution patterns and give proposals.
180 The Wikipedia, Free Encyclopedia. (2015, Jan 15). Ministry of Commerce of People's Republic of China. Retrieved from https://en.wikipedia.org 181 Ministry of Commerce, China. (2016, June 03). Mission Statement. Retrieved from Ministry of Commerce Website: http://english.mofcom.gov.cn/column/mission2010.shtml
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2. To advance the structural readjustment of distribution industries, guide the reform of distribution enterprises, the development of commercial and trade services, as well as community commerce, put forward policies and proposals for promoting the small and medium-sized enterprises in commerce and trade areas, and promote distribution standardization and such modern distribution modalities as chain store operation, franchising, logistics and e-commerce.
3. To formulate development plans for domestic trade, foster and develop urban and rural markets, study and put forward the policies guiding domestic and foreign capital to flow to the development of a market system, to guide the program of bulk commodities retail markets and the planning of urban commercial networks, guide the construction of the commercial system, advance rural market system construction and organize and implement modern rural distribution networks.
4. To lead the coordination work for rectifying and standardizing market economy order, formulate policies for standardizing market operation and distribution order, promote credit building in commerce sectors, give guidance to sales based on business credit, construct public service platforms based on market credibility, and supervise and administer the special distribution industries according to relevant rules.
5. To organize the adjustment of market of major consumer goods and regulation of the distribution of major means of production, institute an emergency management mechanism for the market supply of life necessities, monitor and analyze market activities and commodity supply and demand, study and analyze the commodity information to make forecasts, issue early warnings and provide guiding information. To be responsible for important consumer goods reserve management and market regulation in line with its assignments. To supervise and regulate refined oil distribution in accordance with relevant regulations.
6. To work out measures for the regulation of import and export commodities and processing trade, and compile catalogues of import and export commodities and technologies. To draft polices and measures for facilitating the transformation of foreign trade growth pattern. To organize the implementation of import and export quota plan of important industrial products, raw materials and important agricultural products. To work with other ministries and commissions to coordinate the import and export of bulk commodities, guide trade promotion activities and the development of the foreign trade promotion system.
7. To draft and execute policies concerning trade in technology, export control and policies encouraging the import and export of technology and complete set of equipment; to push forward the establishment of foreign trade standardization system. To supervise technology introduction, equipment import, export of domestic technologies subject to state export restriction, and to issue import and export licenses pertaining to national security issues such as nuclear non-proliferation in conformity with laws.
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8. To lead the efforts to draft development plans for trade in services and carry out 8elevant work, work with other ministries and commissions to formulate and enforce the plans and policies for promoting services export and services outsourcing development. To facilitate the construction of services outsourcing platforms.
9. To formulate multilateral and bilateral (including regional and free trade area) trade and economic cooperation strategies and policies, be responsible for multilateral and bilateral negotiations on trade and economic issues, coordinate domestic positions in negotiating with foreign parties, and to sign the relevant documents and monitor their implementation. To establish multilateral and bilateral intergovernmental liaison mechanisms for economic and trade affairs and organize the related work. To handle major issues in country (region)-specific economic and trade relationships, regulate trade and economic activities with countries without diplomatic relationship with China. In line with the mandate, to handle the relationship with the World Trade Organization on behalf of the Chinese government, undertake such responsibilities under the framework of the WTO as multilateral and bilateral negotiations, trade policy reviews, dispute settlement, and notifications and inquires and to coordinate trade and economic activities with foreign parties.
10. To organize and coordinate the work pertaining to antidumping, countervailing, safeguard measures and other issues related to fair trade for import and export. To institute a fair trade early warning mechanism for import and export and organize foreign trade investigations and industry injury investigations in compliance with law. To guide and coordinate domestic efforts in responding to industry security inquires and foreign antidumping, countervailing, and safeguard investigations.
11. To give general guidance to nationwide efforts in foreign investment. To draw up and enforce foreign investment policies and reform schemes. To examine and approve, according to relevant laws, the establishment and changes thereafter of foreign-invested enterprises. To verify the contracts and statutes of large-scale projects with foreign investment and their major subsequent changes particularly stipulated in relevant legislations. To supervise and inspect the enforcement of laws, regulations, contracts and statutes by foreign-invested enterprises and coordinate the solution of relevant issues. To guide investment promotion and the approval of foreign-invested enterprises and regulate foreign investment attraction activities. To guide the work of state-level economic and technological development zones, Suzhou Industrial Park and border economic cooperation zones.
12. To be responsible for China's foreign economic cooperation efforts. To formulate and implement policies on foreign economic cooperation, guide and monitor overseas project contracting and labor service cooperation in accordance with laws, promulgate policies governing the overseas employment of Chinese citizens, and take the lead in protecting the rights and interests of Chinese citizens providing labor services or taking up jobs overseas. To work out administrative measures and
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specific policies guiding China's outward investment and approve Chinese companies to invest in and set up overseas establishments (excluding financial companies).
13. To be in charge of China's efforts in providing aid to foreign countries and regions. To formulate and implement China's foreign aid policies and plans, facilitate the reform on foreign aid provision modalities, compile foreign aid programs, select foreign aid projects and organize their implementations. To manage funds in the nature of China's official foreign assistance, the grant aid provided to China through multilateral and bilateral channels (excluding the grants provided by foreign governments and international financial institutions under the framework of fiscal cooperation) and other development cooperation programs.
14. To formulate and implement economic and trade plans and policies with the Hong Kong Special Administrative Region (HK SAR), the Macao Special Administrative Region (Macao SAR) and the Taiwan region. To hold economic and trade talks and sign relevant documents with the competent authorities in charge of trade and economic affairs in HK SAR, Macao SAR and the Taiwan region. To be in charge of the commercial and trade liaison mechanisms between the mainland and HK SAR and Macao SAR. To organize the direct trading activities with Taiwan, and deal with bilateral and multilateral trade issues involving Taiwan.
15. To launch anti-monopoly investigations on the concentration of undertakings, guide Chinese companies' response to monopoly allegations overseas and carry out bilateral and multilateral exchanges and cooperation on competition policies.
16. To steer the work of the commercial branches of China's permanent missions to the WTO, to the UN and other relevant international organizations, as well as Chinese embassies in foreign countries, providing guidance to their work, and training and selecting the staff. To keep in touch with the representative offices of multilateral and international economic and trade organizations in China and the commercial functions of foreign diplomatic missions in China.
17. To undertake other assignments entrusted by the State Council.
3.4 INTERNATIONAL INVESTMENTS AGREEMENTS & BILATERAL
INVESTMENT TREATIES OF CHINA
To date, China has executed almost 145 Bilateral Investment Treaties with
different countries and 20 Intentional Investment Agreements (IIAs) (UNCTAD,
2016)182. It is argued that China should change its position from old style of BITs to new
moderate one especially lessons learned from investor State Dispute Settlement (Wenhua
182United Nation Commission for Trade and Development. (2016, June 04). Complete list of BITs. Retrieved from United Nation Commission for Trade and Development website: http://Investmentpolicyhub.unctad.org/IIA/CountryBits/42
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and Jinyuan, 2014)183. The present policy regime of China started in 1978 after
promulgation of the “Sino Foreign Equity Joint Ventures Law”184. China signed first BIT
with Sweden in 1982 and thereafter in the middle of 80’s, China executed a dozen of BIT
with Western European States. In the end of 1980 and start of 1990, China entered into
BITs, with states in Eastern Europe and Asia. BITs negotiated by China are divided into
three parts i.e. i) first part comprises of the period of 1980s, ii) second part comprises of
the period of 1990s and iii) third part is that portion of BITs, that were signed in late
1990s (Gallagher and Wenhua, 2009)185.
For example, the China’s BIT signed with Germany contained provisions relating
to definition, fair and equitable treatment, most favored national treatment, expropriation,
compensation for damages and losses, whereas second type of BITs include a qualified
national treatment standard and umbrella clause. China signed the Convention of the
Settlement of Investment Disputes between states and Nationals of Other State (ICSID
Convention) on February 6, 1993 (International Center for Settlement of Investment
Disputes, 2015)186. The last generation of BITs covers for access of all investor-state
disputes to ICSID (Gallagher and Wenhua, 2009)187. Domestically, there are two
determinants that would help to shape China’s view on future investment treaties on the
changing role of PRC in international investment and other is potential negotiating
partners of the future investment treaties. Latest, two major economies of Globe i.e. US
and European has approached China for potential BIT negotiation. China and US started
deliberations on US China BIT in 1983, but failed due to difference of issue, but the same
was again resumed at the 4th US China strategic Economic Dialogue in 2008. It is argued
that if succeeded, the US model BIT convers both investment protection and
liberalization. This development would definitely affect the formulation of China’s future
investment treaties. In European Union, followed by Lisbon Treaty of December, 2009,
the subject of FDI has been shifted from member states to EU. This shift has given rise to
a number of substantive and procedural question about EU investment policymaking at
183 Shan, Wenhua., Su Jinyuan (Eds). (2014). China and International investment law: Twenty years of ICSID Membership. BrillNijhoff. 173 184 Adopted at the Second Session of the Fifth National People’s Congress in 1979 and amended in 1990 and 2001 respectively 185 Gallagher, Norah., Shan, Wenhua. (2009). Chinese Investment Treaties Policy and Practice. London, Oxford University Press. 1.65 186 International Center for Settlement of Investment Disputes. (2015, Jan 17). Contracting States. Retrieved from International Center for Settlement of Investment Disputes website: http://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDOCRH& actionVal=ContractingStates&reqfrom=Main 187 Gallagher, Norah., Shan, Wenhua, Supra, note 185. 1.78
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International level188. In the wake of Lisbon Treaty, both leaders of EU and China
expressed support for a possible China EU investment treaty and “agreed to work
towards the start of negotiation as soon as possible”. Normally, BIT claims are not based
on contract but are executed in terms of a BIT. It is immaterial that there should be or
ought to be relevant agreement relationship between states (Kim M.Rooney, 2007)189.
1. Chinese Bilateral Investment Treaties: Arbitral Progress and Problems at ICSID
Since becoming the active member of ICSID, China has been a prolific state who
has executed a number of BITs second to Germany. Singing of ICSID convention is
considered to be an important milestone for China due to the fact that both domestically
in China and globally much developments and evolution has changed the international
investment law hardly in the two decades. Over these years, the definition of investor
protection in the multilateral investment agreements and treaties has changed
dramatically. After ratifying the ICSID convention, the way of BITs negotiations have
also been changed. Like, acceptance to the intentional arbitration under a treaty is
recognized. It is a revolutionary step in the international investment law, which ensures
protection to global investment under the treaties. It has been stated that this “arbitration
entitlement is one of the most progressive developments in the procedure of international
law of the past fifty years. It is consistent with the development of international human
rights (including the right to own property) and with dethroning the state from its status
as the sole subject of international law”(Stephen M.Schwebel, 2008)190.
Ever since, China’s ratification of ICSID convention, the number of cases
registered each year at ICSID were two. Today, this increased to forty claims being filed
annually at ICSID. China has only become active participant in concluding investment
treaties and has one of the large treaty networks worldwide191. Treaties in China are still
signed having no reference to ICSID. As per ICSID Convention, mere signature and
ratification of ICSID convention does not mean consent to arbitrate has been conferred
188 UNCTAD World Investment Report, 2001, at Box III.5. 189 Kim M.Rooney. (2007). ICSID and BIT Arbitrations and China, Journal of International Arbitration. Kluwer Law International. Volume 24, Issue 6, pp. 689-712, 691. 190Stephen M.Schwebel. (2008). A BIT about ICSID. ICSID Review FILJ 23: 1, at page 4, See also comments of Prof. Sir Elihu Lawterpacht, CBE, QC in the foreword in C.Schreuer, with L.Malintoppi, A.Reinisch, and A, Sinclair. (2009). The ICSID Convention: A commentary. (2nd Edition)., Cambridge university Press. Where he notes that many of the features of the ICSID convention “represented significant new development, though in the light of subsequent advances in international law they now appear commonplace.” P.ix 191 Second only to Germany although this gap has been closing in recent years and China looks set to overtake Germany for the top place soon.
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(Garanti Koza LLP v Turmenistan, 2013)192. So far, China has one claim filed against it
to date. This dearth of claims against China may be because of China’s out of Court
settlement/compromise with investor if and when a dispute does arise (Ekram Berhad
v.China)193. China has entered into its first BIT with Sweden some thirty years back in
1982. In this BIT, there was no provisions relating to investor state arbitration, but a mere
note of understandings included at the end of the treaty. In this treaty, Sweden
acknowledged that since China had not acceded to ICSID Convention and incase if it
accedes to ICSID Convention in future, then a supplemented agreement would be signed
to provide for binding dispute resolution194. Since 1982, China has started execution of
treaties in different forms depending on the Model Bit, which is being negotiated with a
particular states195. Even the treaty the China has signed with Canada after 20 years of
negotiations has altogether different characteristics. Though, the treaty is signed in 2012,
and is not yet enforced, but is considered to be the most extensive bilateral investment
agreement signed by China so far as described by MOFCOM, which is as under:-
“The most extensive bilateral investment agreement signed by China so far.Besides clauses concerning the definitions of investment, scope of application, minimum standard of treatment, most favored nation treatment, national treatment, expropriation, transfer, subrogation, taxation, disputes settlement, general exceptions and other clauses, the Agreement also includes special provisions on such matters as taxation and prudential carve-out, which is different from the other existing investment treaties between China and other parties, reflecting the new development trend of international investment agreement” (Ministry of Commerce, China, 2012)196.
This treaty resembles some of features of NAFTA. It is based on the Canadian
Model BIT and is called “Foreign Investment Promotion and Protection Agreement
(FIPA)”197. For example, sections on investor state dispute resolution refers to types of
192 Preamble to ICSID convention 1965. See also Report of the Executive Directors on the Convention paras, 23-15. For detailed consideration of the consent requirements, see also the recent award in the Garanti Koza LLP v Turmenistan, ICSID, ICSID Case No.ARB/11/20 Decision on the objection of Jurisdiction for Lack of consent 3 July, 2013. 193 Ekram Berhad v.China was settled relatively quickly even before a tribunal was nominated with the case being suspended at the request of the parties a mere two month’s after being file at ICSID. A settlement was reached also in the Danone/Wahaha JV disagreement. The French company reached a settlement with China’s Hangzhou Wahaha Group Co for its 51% share in JV, see Reuters report of 30 September, 209 at www.reuter.com/article/2009/09/30/US-danone-wahaha-idUSTRE58IT 194 See letter attached to China Sweden BIT 1982 signed 29 March, 1982. 195 See for example the provision of the China-Japan, which is not alike China Model of that time. 196 Ministry of Commerce, China. (2012, Sept 13). Interpretation of China-Canada Bilateral Investment Protection Agreement by An Official from the Department of Treaty and law of MOFCOM. Retrieved from Ministry of Commerce, China website: http://english.mofcom.gov.cn/article/policyrelease/cocoon/201209/20120908359187.shtml 197 The full text of Canada’s Model BIT (FIPA) can be had: italaw.com/documents/Canadian2004-FIPA-model-en.pdf and for NAFTA see http://www.nafta-sec-alena.org/
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arbitration available-ICSID, ICSID Additional Facility or UNCITRAL arbitration. There
are certain General Exceptions, which were never seen before in China Model Like
protection of human anima or plant life and health and the conservation of ‘living’ or
‘non-living’ exhaustible natural resources198. Making exceptions in the BITs by China
has become more common practice as compared to oil Chinese Model BIT. Some of later
treaties of China also include natural treatment and most favored nation provisions.
Another example of Chinese BI si trilateral investment treaty between China, Japan and
Korea. This treaty limits provisions for security exceptions. Article 18 of the treaty says
that the state can take measures necessary for the protection of essential security interest
in the time of war or other emergency or to comply with UN Charter obligations to
maintain “international peace and security”. The above treaties signed by China are much
longer than the current model, which indicates a novel shift in the policy by China199. It is
now foreseen that China must review and revise its existing treaty model practice and
must change its current Model BIT. The terms of these newer treaties, especially that of
Canada and China, will no doubt influence on the continuing negotiations with the USA.
Chinese negotiation with US failed in the 1980s due to some deadlock on critical issues
including national treatment. These discussion again started in 2008. China agreed to
drop its original position when certain sectors would be excluded, especially service
sector. China also accepted that a future treaty would include market access on a “pre-
establishment” basis and negotiations with a “negative list” approach. The US Secretary
Jack Lew noted this development in following words (Paul Eckert and Anna
Yukhananov, 2013)200:
“China announced its intention to negotiate a high standard bilateral investment treaty with US that will include all stages of investment and all sectors- a significant breakthrough, and the first time China has agreed to do so with another country.”
China has also started talks with EU on an investment treaty in Feb, 2012 and
European Parliament had held a meeting on the EU-China BIT in November, 2012. The
198 Canada-China BIT (2012), Article 33(2)(b) 199 The BITS since its inception of 1959 (Germany and Pakistan) is gradually evolving themselves. Some of the states have developed their own unique model. After signing BIT by Germany and Pakistan, BITs have been titled to provide for investor states arbitration and not just state-states arbitration. 200 Paul Eckert and Anna Yukhananov. (2013, July 12). U.S., China agree to restart investment treaty talks. Reuters.
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status of existing BITs between China and some of the member states of EU would also
be considered in the light of latest regulation of EU that came into effect in January,
2013201. This is first time that EU will have entered into such negotiation since exclusive
competence for Foreign Direct Investment in wake of Article 207 of Lisbon Treaty.
These two investment treaties negotiations with EU and Us would have longer affect not
only for China but for global investment scenario as well.
2 Free Trade Agreement
In order to participate globally and to bring reforms domestically, China has
started the policy of Free Trade Agreements (Ministry of Commerce, China. 2012)202.
The FTAs so far executed by China consists one chapter each for investment, like FTA
entered into with Chile (2005). It has special provisions on investment promotion under
Article 112. China is also actively involved itself with negotiation with Gulf Cooperation
Council, Australia, Norway and South African Customs Union. Not to mention, these
negotiations are other than feasibilities studies of FTAs with India, Korea, Korea and
Japan and Sri Lanka. The FTA regime of China has also been changing since its signing
the ICSID convention as witnessed by investment treaty practice (Shan, Wenhua and Su
Jinyuan, 2014)203.
3 China’s Model BIT
China’s current Model BIT was first adopted in late 1990. At the time of
adoption, it was third revision of Model. China BIT program has seen gradual expansion
through three generations of BITs. In 1982, China concluded its first BIT with Sweden,
thereafter, a surge was witnessed in China’s active participation in international BITs
regime. The current model more like contains features from other model BIT of different
countries including substantive protection and investor-state disputes to ICSID for
arbitration204. This right is subject to a proviso that the host state “may require the
201 The regulation (EU) No.1219/2012 of the European Parliament and of the Council of 12 December, 2012 establishing transitional arrangements for bilateral investment agreements between Member states and third countries DJL 351/40 20 December, 2012. 202 Ministry of Commerce, China. (2012, Sept 13). Free Trade Agreement. Retrieved from Ministry of Commerce, China, website: http://fta.mofcom.gov.cn/english/index.shtml 203 Shan, Wenhua., Su Jinyuan (Eds). (2014). China and International investment law: Twenty years of ICSID Membership. BrillNijhoff. 173 204 Article 9(I) of current model BIT relates to disputes resolution mechanism, and incase of any dispute, the same shall be settled amicably. Incase of failed settlement, then investor can choose domestic forum of the host states to commence ICSID arbitration for
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investor concerned to of through domestics administrative review procedures specified by
the laws and regulations of that contracting party before the submission to the ICSID”205.
China consistently included this proviso in every BIT that it entered into with other
country. Like Canada BIT and in the case of Japan-Korea, the language of proviso is not
made mandatory, incase of any dispute under this treaty, the China would not press for
domestic review procedure and permit the investor to proceed directly to ICSID. It is
high time for China to reconsider her model BIT to bring it more in line with its newer
format of treaties. All of China’s model BITs included a consultation provisions but the
ones included in the Canada BIT do not mirror this language. It is estimated that till 2014,
so far 130 BITs were entered into by China, out of which 105 BITs are in force. The
following would show the year and country with whom China concluded its BIT206:-
1. 17 BITs were concluded in 1980s
2. 59 BITs were made in 1990s
3. 29 BITs were signed or renewed in or after year 2000
After China signed ICSID convention in 1993, it was forced to update and
modernize BITs as to the dispute resolution clause, which are mostly found in post ICSID
era. The pace of revision in BITs by China increased after becoming member of WTO
(Kidane Won and Zhu Weidong, 2014)207. Since accession to ICSID and WTO, 12% of
China BITs have been replaced by new BITs, which shows that China is redrawing its
BITs regime in line with international commitment, thus make it more competitive ever
before in the International investment countries. In order to understand the BIT regime of
China and its revolution, we have to analyze the main provisions of BITs as under:-
i) Preamble
Most of BITs contain preamble clause, which defines intention of contracting
parties and the purposes for which these BITs are concluded. It does not talk about
litigation. The two earlier model BITs (from about 1984 and 1990) related adhoc arbitration any dispute on the amount of compensation for expropriation only. 205 Article 9(2)(b) Model BIT. This wording is found in many of China’s BITs for example in the Seychelles BIT 2007, Article 8(2) (b). The Mexico BIT 2008 includes an Appendix to Article 13 (5) confirming that the investor shall go through the relevant administrative review procedures. If not complete within 4 months international arbitration can be commenced. 206 See UNCTAD IIA Database, available at http://investmentpolicyhub.unctad.org/IIA 207 Kidane, Won and Zhu, Weidong. (2014, July 18). China-African Investment Treaties: Old Rules, New Challenges. Fordham International Law Journal, vol.37, 2014, 1053
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procedural and substantive provisions relating to BITs (UNCTAD, 2007)208. However, as
per Vienna Convention on the Law of Treaties, preamble is a part of agreement and is
resourceful in interpreting the purpose an objective of the agreement209. This approach is
seen in most of BITs, for example, China-Italy BIT states as under210:-
“Desiring to intensity economic cooperation between both countries, Intending to create favorable conditions for investments by nationals and companies of either country in the territory of the other country and Recognizing that encouragement and protection of such investments will benefit the economic prosperity of both countries,”
This preamble is based on mutual understanding from both “China and Italy that
through this BIT, both countries would foster economic cooperation and would make
sure favorable condition for two way investment that can be beneficial in harvesting
prosperity in the host state (UNCTAD, 2007)211. This similar preamble clause is also
found in many BITs concluded in 1980s and 1990s212. Further, a large number of BITs
shows that they would not promote or protect investment that are dangerous to health,
safety, labor protection and the environment (UNCTAD, 2007)213, like in China-Korea-
Japan Investment agreement adopted this trend in tis preamble in following words,
“Recognizing that these objectives can be achieved without relaxing health, safety and
environment measures”214.
ii) Definitions
For the last ten years of BITs, definitions in international investment law used to
cover investors and investment. Only, investment is not limited to Foreign Direct
Investment and but include all kinds of investment (UNCTAD, 2007)215. In includes all
sort of assets acquired by the investor in host country. Keeping such elaboration in mind,
208 United Nations Conference on Trade and Development. (2007). Bilateral Investment Treaties 1995-2006: Trends in Investment Rulemaking, United Nations. 209 See Article 31 of Vienna Convention on the Law of Treaties. 210 See Agreement between the Govt. of Peoples’ Republic of China and the Govt. of Italy 211 United Nations Conference on Trade and Development. (2007). Bilateral Investment Treaties 1995-2006: Trends in Investment Rulemaking, United Nations. 3 212 BITs China entered into with Belgian-Luxembourg, Switzerland, and the Netherlands have been replaced by the new BITs. 213 Supra, note 211, page 4. 214 See Agreement Among the Government of the People's Republic of China, the Government of Japan and the Government of the Republic of Korea for the Promotion, Facilitation and Protection of Investment. 215 Supra, note 211, page 8.
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China is using this method to define what investment to be included in BITs like China-
Switzerland BIT, the investment is defined as follows:-
“The term ‘investment shall include every kind of asset, and in particular: (a) movable and immovable property as well as any other rights in rem, such as servitudes, mortgages, liens, pledges and usufructs; (b) shares, parts or any other kind of participation in companies; (c) claims to money or to any performance having an economic value; (d) copyrights, industrial property rights (such as patents, utility models, industrial designs or models, trade or service marks, trade names, indications of origin), know-how and goodwill; (e) business concessions under public law, including concessions to search for, extract or exploit natural resources as well as all other rights given by law, by contract or by decision of the authority in accordance with the law”216.
Dutch Model of BIT also contains same approach. However, US define
investment differently. US Model BITs of 2012 puts investment into circular definition
and close lists definition217. This approach refers to jurisdiction problem, where
investment is made by one company incorporated in non-contracting state into another
contracting state, but non-contracting state company is controlled by the investor from
the other contracting part. In this case, US investor can bring arbitration case against host
state irrespective of the fact that investment is made by entity in contracting state, but he
has to only prove that the investment is directly or indirectly controlled by him. China,
however, has taken note of this flaw by extending the definitions of investors. For
example, China-Uzbekistan 2011, stipulates that companies of non-contracting state, but
owned or controlled by national in para (a) or enterprise in para (b)218 is deemed to be a
qualified investor for the purposes of that BIT. The definition of investment in most of
FIT concluded by China varies from case to case to case, like, in China Belgium-
Luxemburg Economic Union, the definition of investment is as follows:-
216 See Agreement Between the Government of the People's Republic of China and the Government of the Confederation of Switzerland on the Reciprocal Promotion and Protection of Investments. 217 See Article 1, Section A of 2012 U.S. Model Bilateral Investment Treaty: “investment” means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. Forms that an investment may take include: (a) an enterprise; (b) shares, stock, and other forms of equity participation in an enterprise; (c) bonds, debentures, other debt instruments, and loans; (d) futures, options, and other derivatives; (e) turnkey, construction, management, production, concession, revenue-sharing, and other similar contracts; (f) intellectual property rights; (g) licenses, authorizations, permits, and similar rights conferred pursuant to domestic law; and other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages, liens, and pledges. 218 Paragraph (a) and paragraph (b) of Article 2 (2) China- Uzbekistan BIT stipulate that: the term “national” means natural persons who have nationality of either Contracting Party in accordance with the applicable laws of that Contracting Party; “enterprise” means any entities, including companies, firms, associations, partnerships and other organizations incorporated or constituted under the applicable laws and regulations of either Contracting Party and have their seats and substantial business activities in that Contracting Party, irrespective of whether or not for profit and whether it is owned or controlled by private person or government or not.
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“ Investment means every kind of asset invested by investors of one contracting
party in accordance with the laws and regulations of the other contracting party
in the territory of the latter, and in particular[…].’’219
In this definition, investment is clogged with limitations that investment covered
by BIT shall company with law and regulation of host state, otherwise, it would not be
considered as an investment in BIT.
Another important definition in any Bit is that of ‘National’. As only one National
of either contracting state may bring a claim under BIT. The term National is further
sub0divided into two categories, i) natural persons and ii) legal persons (Peter J. Turner,
2007)220. Nationality of a natural person, sometimes is subjected to dispute, where the
issue of dual nationality are involved. In the famous case of Soufraki v.UAE221, Mr.
Soufraki, claimant, based his claim against UAE under Italy-UAE BIT on the ground that
nationality of Italy. However, he was also dual nationality holder of Canada. The claim of
Mr. Soufraki, was resisted by the UAE on the ground that since he is dual national of two
country and Canadian nationality having been acquired after Italian nationality, therefore,
he could not rely on nationality off Italy to bring the claim as investor under the
definition of investor. Furthermore, the Canadian nationality was rather dormant
nationality, which itself make him investor under investor definition in terms of Italy-
UAE BIT. The Tribunal further held that it is competent to examine the issue of dual
nationality whether he has a qualified Italian citizen and what is his status under Italian
law. If we examine, the vires of this provision under Chinese laws, it is revealed that
under Chinese local laws222 strictly prohibits dual nationality. In reality, there are a
number of Chinese dual nationals in China. By applying the decision of Tribunal to
initiate claims under Chinese BITs. If tribunal attempts to examine the issue of dual
nationality in the light of laws of China and would come to the conclusion that it does not
have jurisdiction on the issue that claimant is not a qualified investor defined in China-
BIT, which would ultimately create problems for both Chinese investors.
219 See article 1 paragraph 2 of Agreement between the Government of The People’s Republic of China and the Belgium-Luxemburg Economic Union on the Reciprocal Promotion and Protection of Investments. 220 Peter J. Turner. (2007). Chapter 10 Investor State Arbitration in Michael J. Moser (ed.), Managing Business Disputes in Today's China: Duelling with Dragons. Kluwer Law International. pp. 233 – 258, 236. 221 Soufraki v. United Arab Emirates, ICSID Case No. ARB/02/7. 222 Article 9 of the Nationality Law of China of 1980.
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Whereas legal person have two criteria under China-BIT, which includes place of
incorporation and the seat of the company. Very often, investment are driven through
different mode of corporate vehicles, due to which many issues relating to whether legal
person are qualified as an investors under a given BIT. Chinese-Uzbek BIT allows legal
persons indirectly holding investment to be included in BIT, when there is not specific
clause in this regard. ICSID cases show that BIT are applicable on these kinds of
investment. Despite silence of BIT on this issue, the tribunal concluded that there are no
proof that such kind of indirect investment need a literal nor systematic interpretation
(Siemens A.G. v. The Argentine Republic, 2004)223.
iii) Fair and Equitable Treatment
Article 2(1) of Chinese-Swiss BIT contains the clause relating to fair and
equitable treatment. It says that “Each Contracting State shall at all-time ensure fair and
equitable treatment to the investments by investors of the other Contracting State”.
Almost all BITs of China have this standard. Some of BITs (Like France-Uganda BIT)
refers fair and equitable treatment as per standards of international law224. This approach
avoids the standard to be interpreted in Semantic approach (UNCTAD, 2007)225.
Whereas, China adopts the plain fairness standard for interpretation of this clause, which
also depends on the tribunal’s decision, who interpret these provisions in their own way,
as a consequence, the tribunal also faces uncertainty in their decision when there is
uncertainty of the interpretation of fair and equitable treatment, therefore, the decisions of
the tribunal varies in their conclusion.
iv) Most Favoured Nation Treatment
This standard is also found in almost every BIT. According to this standard, a host
country would treat the investor or investment from a BIT contracting states at part with
the investors or investment in the like circumstances from any other country (Kim M.
223 Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction dated 3 August 2004, 44 ILM 138 (2005). 224 See Article 3 of Agreement Between the Government of the Republic Of France and the Government of the Republic of Uganda on the Reciprocal Promotion and Protection of Investments. 225 United Nations Conference on Trade and Development. (2007) Bilateral Investment Treaties 1995-2006 : Trends in Investment Rulemaking. United Nations. 31
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Rooney, 2007)226. It is binding upon the countries that if they agree to accord this
treatment to any other country, they would also likewise grant same treatment to partner
BIT (Scott Vesel. 2007)227. This standard is found in China BIT since its first BIT with
Sweden-China. Germany BIT stipulates that:
“(N)either Contracting Party shall subject investments and activities associated
with such investments by the investors of the other Contracting Party to treatment
less favorable than that accorded to the investments and associated activities by
the investors of any third State.”228
While conferring MFN treatment, as a matter of principle, a MFN clause should
also have effect on procedural of importing procedural rights (Kim M. Rooney, 2007).229
This challenge is also faced by the tribunal and it adopted different means to tackle this
problem in the case of Maffezini v.Spain230, the tribunal held that provisions relating to
international arbitration and other dispute resolution mechanism must be part of treatment
under MFN clause as it is necessary for investment protection. In other case of Plama231,
the tribunal took a narrow approach of interpretation of this clause given various reasons
such as treaty-shopping and intention of the parties.
v) Expropriation
The main cause of concern for foreign investor while investing in another country
is protection of his or her investments against unforeseen risk like unlawful
nationalization or expropriation (UNCTAD, 2007)232. In general, BITs allows host state
to expropriate investment on two conditions i.e. public interest and under due process.
Article 3 of the China-Sweden BIT stipulates that “(N)either Contracting State shall
expropriate or nationalize, or take any other similar measure in regard to, an investment
226 Kim M. Rooney. (2007). ICSID and BIT Arbitrations and China. Journal of International Arbitration. Kluwer Law International. Volume 24 Issue 6) pp. 689 – 712, 695. 227 Scott Vesel. (2007). Clearing a path though a tangled jurisprudence: Most-favored-nation clauses and dispute settlement provisions in bilateral investment treaties. 32 YALE J. INT’L L.126. 228 Article 3 (3) of Agreement between the Federal Republic of Germany and the People's Republic of China on the Encouragement and Reciprocal Protection of Investments. 229 Kim M. Rooney. (2007). ICSID and BIT Arbitrations and China. Journal of International Arbitration. Kluwer Law International. Volume 24 Issue 6) pp. 689 – 712, 706. 230 Emilio Agustín Maffezini v. Kingdom of Spain, ICSID Case No. ARB/97/7. 231 Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24. 232 United Nations Conference on Trade and Development. (2007) Bilateral Investment Treaties 1995-2006 : Trends in Investment Rulemaking. United Nations. 44.
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made in its territory by an investor of the order Contracting State, except in the public
interest, under due process of law and against compensation, the purpose of which shall
be to place the investor in the same financial position as that in which the investor would
have been if the expropriation or nationalization had not taken place”. Bare perusal of
above expropriation clause, it is clear that expropriation has been given the broader
definition, including nationalization, expropriation and any other measures that have
similar effects of expropriations and nationalization. China has used various languages
for expropriation. Like, in China-Dutch BIT, no specific reference has been given for
indirect expropriation or nationalization. As against China Germany BIT, where host
countries are not allowed either directly or indirectly from expropriation or natiolization
of global investment. (Further details is given in the separate heading hereunder
“Expropriation”.
vi) Umbrella Clause
Umbrella clause is inserted in BIT to provide cover to commitment and assurance
made by the host country with foreign investors in relations to his investment233. Article
3(4) of China-Netherlands BIT says that “Each Contracting Party shall observe any
commitments it may have entered into with the investors of the other Contracting Party
with regard to their investments’’. This clause is equivalent with dispute resolution
clause, as both provides for protection to investment and is only workable where the
contract is with the state for which states bears necessary responsibility under customary
international law. According to this clause, the host state would be responsible to observe
all investment related obligations in all BITs, investment treaties and investment
contracts. The importance of their application is for the facts that arbitration tribunal set
up under BIT would have jurisdiction over breach of agreement cases as breach of
investment agreement is also treated breach of Umbrella clause (Wong, Jarrod., 2008) 234.
The tribunal cannot exercise jurisdiction if the contract provides for jurisdiction clause to
233 Peter J. Turner. (2007). Chapter 10 Investor State Arbitration in Michael J. Moser (ed.), Managing Business Disputes in Today's China: Duelling with Dragons. Kluwer Law International. pp. 233 – 258, 247. 234 Wong, Jarrod. (2008, Aug 29). Umbrella Clauses in Bilateral Investment Treaties: Of Breaches of Contract, Treaty Violations, and the Divide between Developing and Developed Countries in Foreign Investment Disputes. George Mason Law Review, Vol. 14, 2006. Retrieved from http://ssrn.com/abstract=1260897.
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some other different forum rather than arbitration tribunal (SGS v. Philippines)235. On the
other hand, it was held in (SGS v. Pakistan)236, the application of umbrella clause in
arbitration on the basis of BIT was declined by the Tribunal. Both divergent views show
that there exist uncertainty regarding applicability of umbrella clause under BIT. From
perusal of both cases of SGS, it is clear that application of umbrella clause depends on its
languages used in BITs as well as interpretation by tribunals from case to case.
vii) Compensation for Damages and Losses
Chinese BITs like all other traditional BITs includes this clause for compensation
for damages and losses incase of certain eventualities like war, national emergency, riots
and other similar events, whereby equitable treatment as to indemnification,
compensation and other settlements may be given to investors. This clause is
purposefully put in every BIT by China as majority of China BIT are with politically
unstable countries, where wars and riots usually take place, which result in huge damage
to investor there. For example, Chinese investors faced tremendous loss of investment
opportunities in Libya during Libya War, but Chinese investors could not claim against
Libya govt. because China-Libya BIT was not entered into force.
4 Chinese Arbitration Cases Under BIT
There are no significant number of cases relating to China or Chinese investors
initiated at ICSID. As per record of ICSID, only four cases were filed by Chinese
investors under the investment treaties and one single case filed by a Malaysian investor
against China. The first case was filed at ICSID by a Chinese investor against Peru. One
point for consideration at the initial stage was, whether investor could avail any
protection in the China-Peru BIT 1994. The Tribunal held that an investor from SAR of
Hong Kong is equally entitled to a status of Covered investor under BIT like any
national, therefore, he is entitled for investment protection. “Nationality conferred by a
state to a person under its laws has a strong presumptions of validity”237. The China-Peru
235 See SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6. 236 See SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13. 237 Tza Yap Shum v. Peru, ICSID Case No. ARB/07/6 Jurisdiction Award 19 July 2009 para. 63 (authors translation). Article 1(2)(a) of the China Peru BIT provides, similar to China’s Model BIT, that an investor means any “Natural persons who have nationality of the People’s Republic of China in accordance with its laws . . .” For a commentary see Wei Shen, “The good, the bad or the ugly? A critique of the decision on jurisdiction and competence in Tza Yap Shum v. The Republic of Peru,” Chinese Journal of International Law 10 (2011): 55
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BIT does not expressly contain a bar that Chinese national resident in Hong Kong cannot
file claim nor Article 25 of ICSID convention requires more requisite than nationality.
Peru’s this objection was overruled by the Tribunal holding that Chinese national resident
in Hong Kong can competently file the claim under China-Peru BIT. Another aspect of
the case was most favored Nation (MFN) clause by claimant. Article 8(3) of China Peru
BIT contains dispute resolution clause, which says that:
“If a dispute involving the amount of compensation for expropriation cannot be settled within six months after resort to negotiations as specified in Paragraph 1 of this article, it may be submitted at the request of either party to the international arbitration of the International Center for Settlement of Investment Disputes (ICSID)”.
The Tribunal while considering above provisions held that MFN status cannot be
conferred on the claimant and gave its conclusion based on the wording of above
restrictive dispute resolution clause of Article 8(3). This Article 8(3) is also included in
earlier BITs238. This same qualification appeared in the China Malaysian BIT 1988 relied
by Malaysian investor namely Ekran Berhad. Article 7(4) of this BIT states that disputes
“relating to the amount of compensation and any other disputes agreed upon by the
parties may be submitted to an international Arbitration Tribunal”. The brief facts of the
above case were that the certain rights of leasehold land held by Malaysian investor under
China Malaysian BIT (1988) were revoked by local authority. The land was acquired by
the investor for a construction, timber logging and property development of over 900
hectares in Hainan Province, The revocation of local authority was on the ground that the
investor failed to develop the land in accordance with the local legislation. The investor
filed claim in 2011. Proceedings were suspended by the parties in July, 2011 and the case
was settled in May, 2013. Apart from above, there are other pending claims by Chinese
investors. Two are UNCITRAL arbitrations in accordance with the terms of the relevant
BITs in China Heilongjiang International Economic & Technical Cooperative
Corporation. et al v Mongolia and Phillip Morris Asia Limited v Australia. There are no
awards in either case. The case of Mongolian concerns iron and ore mining licenses and
and Jane Y. Willems, “The Settlement of Investor State Disputes and China: New Developments on ICSID Jurisdiction,” South Carolina Journal of International Law and Business 8 (2011): 1. 238 See e.g. Lithuania BIT 1993 Article 8(2) (b) that permits disputes relating to the amount of compensation “and other disputes agreed upon by both parties may be submitted . . .” to ICSID.
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alleged violation of the China Mongolian BIT 1991. The provisions of investor dispute
resolution provide for adhoc arbitration and “involving the amount of compensation for
expropriation”239. This is an interesting case for China and it is anxiously awaiting the
decision of the tribunal as to the interpretation of above clause.
Another claim was Phillip Morris which was filed in 2011 under Hong Kong
Australian BIT 1993. One of the provisions of provide for Arbitration under UNCITRAL
Rules. The claim involves the issue of plain packing legislation for cigarettes which
according to Australia is a part of a “comprehensive govt. strategy to reduce smoking
rates in Australia”240. The Hong Kong BIT is different in format to the Chinese BITs
relied on the previous cases as it is a broad dispute resolution provisions not requiring
exhaustion of domestic administrative proceedings. The last case was filed by Chinese
investor at ICSID arising out of the financial crises. According to the facts of the case,
Ping An, China’s second largest insurance company sought US$ 3 billion as damages
against Belgium for investment in Fortis, which was nationalized by Belgium Govt. in
2008241.
3.5 CHINA VIZ-A-VIZ INTERNATIONAL INVESTMENT LAW
China since 1990 has emerged as a prominent actor in the development of
international investment law. To this date, China has signed 142 BITs and IIAs more than
any govt. in the world (UNCTAD, 2009)242. China has signed BITs with most of Capital
exporting status as well as developing and transitional economies in Africa, Asia, Eastern
Europe and South America. Prior to 1998, the BITs of China does not contain the
provisions relating to national treatment and rights to pursue investor state arbitration but
239 China Mongolia BIT 1991 Article 8(3), China Heilongjiang International Economic & Technical Cooperative Corp., et al. v. Mongolia UNCITRAL PCA Case. 240 Philip Morris Asia Limited v. Australia UNCITRAL, PCA Case No. 2012-12, Australia’s Response to the Notice Of Arbitration para. 3. See for comments on the cases Andrew D. Mitchell and Sebastian M. Wurzberger, “Boxed In? Australia’s Plain Tobacco Packaging Initiative and International Investment Law,” Arbitration International 27 (2011): 623 and Tania Voon & Andrew Mitchell, “Time to Quit? Assessing International Investment Claims against Plain Tobacco Packaging in Australia,” JIEL 4 (2011): 515. 241 Ping An Life Insurance Company of China, Limited and Ping An Insurance (Group) Company of China, Limited v. Belgium ICSID Case No. ARB/12/29. The Protocol of the Belgium Luxembourg BIT 2005 does confirm that an “investor concerned exhausts the domestic administrative review procedure specified by the laws and regulations of the People’s Republic of China, before submission of the dispute to international arbitration.” This should take no longer than 3 months. See generally Joongi Kim, “A Pivot to Asia in Investor–State Arbitration: The Coming Emergence of Asian Claimants,” ICSID Review FILJ 27 (2012): 399. 242 United Commission for Trade and Development. (2009, June 1). Country Specific Lists of BITS. Retrieved from United Commission for Trade and Development website: http://www.unctad.org/Templates/Page.asp?intItemID=2344&lang=1.
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after 1998, all BITs concluded by China do contain provisions regarding above areas243.
In 1970s, under the leadership of Deng Xiao Ping, China entered an era of gaingekaifung,
reform and opening to the outside world. This move was motivated for a large desire to
attract foreign investment (Charles McClain. (1995)244. Deng opened Chinese Economy
for foreign business in 1979. In that year, the National People’s congress passed the
Equity Joint Venture Law designed to form the legal basis for direct investment. From
1979-80, SEZs were opened (Li Mei Qin, 2000)245. In 1984, 14 coastal Economic open
Areas were announced and 1985, several other areas were set up in Yangtze River
Triangle Regio and elsewhere between 1992-2000. China entered into more than sixty six
BITs. Post Deng China has enjoyed remarkable success in attracting entrepreneurs and
investors from around the world246. China has edge in bringing inward investment into its
economy as compared to other countries like Mexico, Brazil and India (Rohit Sachdev.,
2006)247. The world’s top 500 firms has invested in the country. In 2005, according to
finding of UNCTAD regarding China, it was considered the most attractive global
business location by 85% of transnational corporations and trade exports. Foreign
companies are also account for a substantial percentage of China’s exports and its foreign
currency earnings248.
243 The first Chinese BIT to provide for interntional arbitration in respect of all investor-state disputes was the China-South Africa BIT (signed in December 1997) and the first Chinese BIT to provide for such access to ICSID arbitration was the China-Barbados BIT which entered into force on 20 July 1998. 244 Charles McClain. (1995) China’s Foreign Trade And Foreign Investment Law. Retrieved from http://www.1990institute.org/p ublications/pubs/ISUPAP11.html. These zones benefit from localized “spatial placement” regulations designed to build upon their particular comparative advantages. The Shenzhen SEZ, placed under the control of the Administrative Committee of the Special Economic Zones of Guangdong Province, capitalized on its proximity to Hong Kong. By the early 1990s, cheap labor costs had attracted so many foreign enterprises from Hong Kong that “96% of Shenzhen’s textiles and dyeing, [and] 95% of garment joint-ventures were financed by Hong Kong investors.”; George White, “Foreigners At The Gate: Sweeping Revolutionary Changes On The Central Kingdom’s Landscape--Foreign Direct Investment Regulations & Dispute Resolution Mechanisms In The People’s Republic Of China” Rich. J. Global L. & Bus. 3 (2003): 95, 122. 245 SEZs were opened in Shenzhen, Zhuhai, Shantou and Xiamen. For further reference, see Li Mei Qin. (2000) .Attracting Foreign Investment into the PRC—The Enactment of Foreign Investment Laws. Sing. J. Int’l & Comp. L. 4: 159, 162. 246 UNCTAD, World Investment Report: Transnational Corporations and the Internationalization of R&D (New York, United Nations, 2005), 4, 306. The FDI data available from UNCTAD’s World Investment Report series is based on national balance of payments statistics. UNCTAD notes that “many countries still deviate from International Monetary Fund (IMF) and Organization for Economic Co-operation and Development (OECD) in their collection, definition and reporting of FDI data. FDI is an investment involving a lasting interest by a home-economy entity in an enterprise in a host economy. There are and China. This imbalance is due to factors such as different methods of data collection by host and home countries, different time periods used for recording FDI transaction and different treatment of round-trip investments (a significant factor in China’s case because of the high number of round trip investments between the mainland and Hong Kong). See UNCTAD, World Investment Report: Transnational Corporations and the Internationalization of R&D, (New York, United Nations, 2005), 4–5. 247 Rohit Sachdev. (2006). Comparing The Legal Foundations of Foreign Direct Investment in India and China: Law And The Rule Of Law In The Indian Foreign Direct Investment Context. Colum. Bus. L. Rev.: 167. 248 Estimates range from around 30–50%. See Pitman Potter, “Foreign Investment Law in the PRC: Dilemmas of State Control,” China Q. 141 (1995): 155, 162, citing Mario Blejer et al., China: Economic Reform and Macroeconomic Management (Washington DC: International Monetary Fund, 1991) and PRC State Statistical Bureau, China Statistics Yearbook, 1993.
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3.6 PROMOTION OF INWARD FDI BY CHINA
The purpose of promotion of FDI by China is not for importation of capital and
other monetary benefits, which is one aspect of the matter. Rather, the most important
consideration for doing it for updation of technology transfer, setting-up of new
businesses and efficient business practices either through collaboration or competition
between foreign and domestic firms. It is behind that technology transfer coupled with
inflow of capital into developing countries would change the social-economic condition
of third world countries like developed countries. As per UNCTAD analysis in 2009,
three main determinants for foreign direct investment were identified for host countries,
these are as follows:-
a) General policy framework for foreign investment, including economic,
political and social stability and the legislation affecting foreign
investment.
b) Economic determinants such as the market size, cost of resources and
other inputs (e.g. costs of Labor) are the availability of natural resources.
c) Business facilitation, such as investment promotion including investment
incentives (UNCTAD, 2009)249.
These three determinants are considered to interact, enhance or reduce the
attractiveness of countries for foreign investment. As per the report, IIAs alone can never
be a sufficient policy instrument to attract FDI. There is no linkage between a conclusion
of IIA and FDI inflows. UNCTAD however, noted a “consensus in the literature that host
country market size variables remain the dominant factor for inward FDI, including in the
developing countries”250. This partly explains for example, the considerable inward FDI
inflows into Brazil, a nation which has ratified few IIAs. However, it also concluded that:
“IIAs add a number of important components to the policy and institutional determinants for FDI, and thereby contribute to enhancing the attractiveness of countries. In particular, they improve investment protection and add to the security, transparency, stability and predictability of the investment framework. By liberalizing market access for non-tradable services, and effectively creating a
249 UNCTAD. (2009). The Role of International Investment Agreements in Attracting Foreign Direct Investment to Developing Countries. UNCTAD Series on International Investment Policies for Development. p. xi. 250 UNCTAD, supra note 249. page xiii
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‘market’ for such services, IIAs also improve an important economic determinant of foreign investment”251.
3.7 FACTORS BEHIND CHINA’S INVESTMENT TREATY PROGRAM
What has particularly motivated China to enter a wide range of investment
treaties? The answer to this question is not simple rather multi-faceted. This is due to
effect of accession of China to ICSID Convention in 1990 and ratification in 1993. The
country’s commitment to a “going abroad” strategy in 1998 and adopting a model treaty
closer to the standard used by many other countries thereby avoiding points such as
disputes settlement, national treatment and expropriation. The China has also changed its
stance to bilateral talks with Canada in 1997. Thereafter, China in 2001 acceded to WTO
agreement and outward investment from China to rest of world surged massively in the
early years of 21st century. By the time of these developments, China’s treaty practice had
already evolved. The China’s this active treaty program suggest that the policy maker are
of the opinion that IIAs to be in the national interest. The IIAs which provided for
investors states arbitration in a way remove investment dispute settlement from political
realm, thus relationship between states are saved252. The China’s strategy is also
earmarked due to “Peaceful Rise” policy coupled with regional diplomacy with the
establishment of economic agreements. Through this policy, the China has settled a
number of border disputes, strengthening ties with regional organization and expanding
trade relationship through Asia (Esther Pan, 2006)253. After joining WTO, the China was
under the obligation to start a legal reform with a desire to open its market in accordance
with requirements of WTO. With a result that “State Owned Enterprises” (hereinafter
referred to as “SOE”) are privatized. It is estimated that 135,000 “SOE” are privatized
annually (Mathew Sweeney, 2015)254.
251 Supra note 249. page xii 252 See, for example, the comments of O. Tom Johnson at the Fourth Annual Investment Treaty Arbitration Law Conference (Washington DC, April 30, 2010); conference transcript in Investment Treaty Arbitration and International Law eds. T Weiler, I Laird (New York, Juris, 2012): “Bilateral investment treaties were seen as a way of reaching some, at least bilateral agreement, a series of bilateral agreements on what the [international investment] rules were and most importantly, putting in place a method of resolving disputes that did not require the State Department to become involved every time an American company thought it was being treated badly in a foreign country and thereby take all of these disputes off the bilateral relations agenda between these countries. Let the companies fight it out themselves, we can talk about the important stuff when we go to visit the foreign minister. That’s what was driving this at the beginning.” 253 Esther Pan. (2006, April 14). The Promise and Pitfalls of China’s Peaceful Rise. Council on Foreign Relation. Retrieved from Council on Foreign Relation website: http://www.cfr.org/publication/10446/promise_and_pitfalls_of_chinas_peaceful_rise.html. 254 Mathew Sweeney. (2015, Oct 22). Foreign Direct Investment in India and China. Retrieved fromwww.lawschool.cornell.edu/re search/ilj/upload/sweeney.pdf
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3.8 LEGAL PROTECTION TO FDI IN CHINA
The legal protection under Chinese law is based on Bilateral Investment Treaties
it entered into with other countries. These BITs are drafted on the basis of Chinese Model
of BIT. China so far concluded BITs with almost one hundred and thirty countries. The
salient features of protection (Jian Rongqing, 2006)255 are as under:-
1. In BIT, Chinese got accorded treatment to foreign investment as per its
national laws, which included ‘fair and equitable treatment’, MFN statuses or
‘national treatment’. When a request of foreign investor is rejected or
disallowed by their investment officials of their foreign investment is in the
nature of procedurally unfair as per their judicial system, then the foreign
investor claim for compensation under BITs.
2. In BITs, the expropriation or nationalization of assets are dealt with the
Chinese govt. in the case of public purpose and if it is most expedient and
necessary for public purpose. The said expropriation would be always be as
per legal system of China and foreign investors would be provided
“reasonable, prompt and adequate compensation”.
3. There are some other safeguards in BITs of China that would provide
protection to foreign investment. It is advisable that foreign investor should
carefully study BITs keeping in view of “investment and investor definition
clause”, “compensation and exchange restriction clause”, “host country
default clause”, “right of subrogation”, “dispute resolution”, and “protection
period clause” for estimation of risk that would be faced by foreign
investment instead of future eventualities, when the foreign investors’ right
are infringed. Most of Chinese inward FDI, amicable settlement not involving
court is adopted incase of investment dispute as the first choice of dispute
resolution, which is definitely a fine gesture of Chinese govt. to foreign
investors and their investment.
255Jian Rongqing. (2006, June 27). China: Chinese Practice of Foreign Investment Protection: Bilateral Investment Treaties (BITs). Retrieved from http://www.mondaq.com/x/211866/Inward+Foreign+Investment/Chinese+Practice+of+Foreign+Investment+Protection +Bilateral+Investmen+Treaties+BITs
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Internationally, there are different standards that are practiced by countries for
protection investors and their investments. They are contained in Chinese BITs too.
These standards are protection and security of investment, protection against arbitrary
and discriminatory treatment, national treatment and most favored national treatment.
The common standards of protection are as under:-
i. Fair and Equitable Treatment
This clauses most important clause in investment dispute, which is invoked when
any investor is not treated fairly in line with the treatment provided by the host country to
some other foreign investor, then it is said that rights of FET of foreign investor are
violated. Therefore, when an investor from country should receive the same treatment to
the investment as received by investor of other states, while applying this standards,
tribunal, certain principle are also applicable, which are transparency, consistency,
stability and protection of the investors legitimate expectation, compliance with
contractual obligations, procedural proprietary and due process and freedom from
coercion and harassment (Christoph Schreuer., 2016)256.
ii. Full Protection and Security
Most BITs has clauses namely ‘full protection and security’, whereas some BITs
refer to ‘constant protection and security’ or to ‘security and protection’ under theses
clauses, the host states are expected to adopt measures for protection of foreign
investment from adverse’ effects of states authorities. Normally, this standards is
invoked, where, the states agencies’ involvement in investment to its detriment is
observed. As per case law, this clause not only provides protection against violence, but
also establishes protection against infringements of investors’ rights. Some treaties refer
its standard to be treated as per general international law.
256 Christoph Schreuer. (2016, June 27). Investment, International Protection. Retrieved from www.univie.ac.at/intlaw/wordpress/pdf/ investment_Int_Protection.pdf
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iii. Protection against Arbitrary or Discriminatory Measures
Many treaties are found with this standard also. It provides protection against
arbitrary or discriminatory measures. This standard is also known as “arbitrary or
discriminatory”, “unjustified or discriminatory” and “unreasonable or discriminatory”.
iv. National Treatment
The National Treatment is provided in most BITs. According to these standards,
the foreign investors are to be treated at par with a national of the host state. A better
treatment would be on higher pedestal, if international standards provide so in this regard.
Some of these clauses are applicable once a business is established, while the other
clauses are similar and their application differs due to a number of exemptions of
business sector.
v. Most Favoured Nation Treatment
This standard is required under BIT and is not a requisite for customary law.
Almost every BITs contain such a clause. The purpose of this clause is to make it
mandatory for both states parties to treat each other at par and the same treatment should
not be less favorable than the treatment, they provide to third parties. Any benefit, which
was enjoyed by third states and their national, can definitely be conferrable to the state in
whose favor, the MFN clause operates and as soon as that particular benefits is conferred,
it is automatically extended to the state. MFN clauses contained in all investment treaties.
Some regard it the treatment may not be less favorable than the investors of third states,
while the other, treats them ‘all matters subject to this agreement. Some states explicitly
restrict the scope of this standard by providing exemptions from certain areas like
customs unions, free trade areas and economic communities etc.
3.9 CHINESE INVESTMENT POLICY
China is considered to be a largest recipient of foreign investment so far as
developing countries are concerned. Foreign investment is, in fact, largely contributing
towards promotion of Chinese trade, investment and other revenues for its economy. As
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against traditionally, many structural changes were brought about to further transform
and liberalize investment. These are reviving of equity joint ventures, tremendous growth
in service and relocation of FDI from Eastern Region to the Central and Western
Regions. Hardly, within a span of fourteen years (From 1999 to 2013) and after launching
Go Abroad Policy, the China earned second largest economy in terms of GDP after US
with total amount of US$ 9.240 trillion (World Bank, 2013)257. Due to said policy of
1999, Chinese investments are booming in the past three decades. By the end of 2012, it
is estimated that 16,000 investors established 22,000 companies in 179 countries all over
the world (Ministry of Commerce of People’s Republic of China, 2013)258. China during
last three decades worked really hard to provide its economy a level playing field for
investment (OECD, 2016)259. Its policies remained successful throughout as per
international investors; confidence, the China is still considered one of the favorite
destination for foreign direct investment. During recent global crisis, the China’s success
was not affected in foreign investment as compared to FDI contraction. After 2008,
China has introduced a number of changes in foreign direct investment regime. For
example, the ceiling of provincial examination and approval authority over foreign
investment was raised in the category of “permitted catalogue”. State council also
approve application of approval of service industries as well. In order to develop China’s
central and Western (Commonly called hinterland regimes), which are less grown-up
than Eastern Region, Chinese govt. has put some etc. efforts since 1990s and successfully
implemented many policies to promote both domestic and foreign investment. For this, a
catalogue of advantaged industries for Foreign Investment in the Central and Western
Regions was promulgated in the year 2009, whereby, provinces of Shanxi, Inner
Mongolia, Liaoning, Julin, Heilongjiang, Anhui, Jiangxi, Henan, Hubei, Hunan and
Guangxi were included. For every province, 20 projects were proposed. The customs
laws were also relaxed giving tariff exemptions on equipment imports for certain foreign
investment projects in the central and Western Regions.
257World Bank. (2013). World Development Indicators Databases, Total GDP 2013. Retrieved from http://data.worldbank. org/indicat/NY.GDP.MKTP.CD/coutnries/CN?display=graph 258 Ministry of Commerce of People’s Republic of China. (2013). Guideline on Investment and Cooperation in Foreign Countries and Regions. Retrieved from Ministry of Commerce of People’s Republic of China website: http://fec.mofcom.gov.cn/gbzn/gobiezhinan.shtml 259OECD. (2016, July 10). China Investment Policy. AN UPDATE, by Ken Davies (2013). Retrieved from OECD website: https://www.oecd.org/china/WP-2013_1.pdf at pp. 10
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CHAPTER 4
MALAYSIAN FOREIGN INVESTMENT LAWS AND PROCEDURE
4.1 INTRODUCTION
Malaysia is federal country ruled by monarchy. It is strategically located in
Southeast Asia. It has 13 states and three federal territories and has capital city Kuala
Lumpur, whereas the Putrajaya is federal govt. city. Historically, it was part of British
Empire. First of British places were Straits Settlement. Malaysia became Federation of
Malaya in 1948 and gained independence in 1957. Its population consists of diverse
cultural people. Majority of people are ethnic Malay, the original inhabitants, whereas
Malaysian Chinese and Malaysian Indians are minorities. The state religion is Islam,
however, other religions are also practiced by non-Muslims. Its legal systems is based on
Common law and it follows parliamentary system of govt. The states are ruled by
traditional monarch namely “Yang di-Pertuan Agong”. He is hereditary monarch elected
from its status every five years, whereas prime minster is responsible for running govt.
affairs (The Wikipedia, 2016)1.
Since independence of 1957, Malaysia had one of good economic millstone and is
known for that in Asia. Its GDP ran at 6.5% for 50 years continuously. The major part of
economy is natural resources, however, it also progressed in science, terrorism,
commerce and medical tourism. At present, its economy is ranked third in Southeast
Asia. Etymologically, it has roots to “Malay Peninsula”. It was also known as “Tanah
Melaya”, before invasions by Colonists. The French navigator “Jules Dumont
d'Urville” during its expedition in 1826, named it “Malaysia”, “Micronesia”, and
“Melanesia”. It also described it “an area commonly known as the East Indies (Ollivier,
I., De Biran, A., Clark, G., 2003)2, when it had independence, it was named “Federation
of Malaya”. Malaysian has deep rooted history covering Indian and Chinese traders, who
1The Wikipedia, Free Encylpedia. (2016, July 23). Malaysia. Retrieved from The Wikipedia website: https://en.wikipedia.or g/wiki/Malaysia 2 d'Urville, J. S. B. C. S. D., Ollivier, I., De Biran, A., Clark, G. (2003). "On the Islands of the Great Ocean". The Journal of Pacific History 38 (2): 163.
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thronged this area for trading their goods. For which, they also settled there. Islam spread
in Malay state in 14th Century and 15th century “Sultan Iskandar Shah” established
“Malacca Sultanate”. Malacca then became one of necessary commercial hub attracting
traders and business men around the region. In 1511, it was raided by Portugal and
subsequently taken over by Dutch in 1641. In 1786, British came in Malaya after leasing
of Penang Island through East Indian Company. 1891 witnessed taking over of Singapore
to British followed by “Anglo Dutch Treaty”, British Empire acquired entire Malacca
state, Singapore and Island of Labuan. British introduced immigration of Chinese and
Indians as part of their labor program. During Second World War, Malaysia was invaded
by Japan and it took over the entire control of Malaysia for three years, which was lateron
taken back by Allied forces. Thereafter, British introduced the program for Malaysia to
unite it under single crown colony called the “Malayan Union”, which was not liked by
Malays. Finally, under the command of “Malayan Communist Party” launched guerilla
operation against British out of Malaya. In 1957, it gained independence as member of
common wealth of Nations.
1. Economy
Malaysia is an industrialized market economy. Malaysia’s economy only in 2014-
15 stood 6th in Asia and 20th in the World. The present success of Malaysia was due to
program of Mahathir Muhammad, who launched vision 2020, by which Mahathir
intended to make Malaysia an industrialized nation by 2020. On the other hand, his
Successor Najib Razak introduced new program by saying that vision 2020 is far later in
achieving and making Malaysian as an industrialized economy. His programs were
“Government Transformation Programme” and “The Economic Transformation
Programme”. As per report of HSBC, Malaysia is predicted to become world’s 21st
largest economy by 2050. It also says “The electronic equipment, petroleum and liquefied
natural gas producer will see a substantial increase in income per capita. Malaysia life
expectancy, relatively high level of schooling, and above average fertility rate will help in
its rapid expansion.”
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In 1970, Malaysia economy was mining and agriculture based economy.
Thereafter, it started its journey towards multi-sector economy that continued up to 1980,
where industrial sector with the help of investment raised the Malaysian economy. The
tremendous growth of Malaysia can be witnessed that is survived “1997 Asian Financial
Crisis” and recovered itself than other neighbors. Chinese are one-quarter of its total
population and control 70 percent of country’s market capitalization. International trade
and manufacturing are that main areas of the economy. Apart from it, Malaysian has a
major export of agriculture and natural resources so also petroleum. Manufacturing
contributes significantly towards its economy. It is also worlds’ largest producers of palm
oil. Malaysian not only rely on manufacturing and above natural resources, but in order to
bring diversity in the economy, tourism has been introduced which is now the third
largest source of foreign exchange. Malaysia govt. also introduced immigration policy
with the name of “Malaysian My Second Home” to allow foreigners to make a long stay
with visa up to ten years. The country has also a strong Islamic Banking network. In
1970s, Malaysia privatized its few military departments which resulted into creation of
Defence industry, thus paving the way for privatized Defence industry. Malaysia also
excelled in science and Technology department, which can be witnessed from the fact
that Malaysian stood as one of digest exporting countries of “semiconductor devises”,
“electrical devices”, and “IT and Communication related products”.
2. Foreign Investments Laws Enforced in Malaysia
Malaysia has no comprehensive foreign investment laws. They have only certain
general principles that allows foreign participation in local business. FDI is regulated in
sector specific sub-ordinate legislation. The protection of foreign investors is guaranteed
in the Constitution of Malaysia itself so also in the investment treaties that were already
signed by Malaysia. Generally, the promotion of foreign investment is regulated by The
Promotion of Investment Act, 1986 as amended in the year 2007 to attract FDI in the
Malaysian Country. The Industrial Coordination Act, 1975 as amended in the year 2010
applies to manufacturing sector. In 2009, the Malaysian Govt. initiated different measures
to streamline ethnic-based investment laws, which was viewed a turning point from
policies that were followed for last fifty years rule in Malaysia. In the new regulations,
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the thirty percent shares to ethnic Malays in the public listed companies were reduced to
12.5%. Some of the sectors were removed from the requirement where Malay partners
must participate (World Socialist Website)3. The most common laws enforced in
Malaysia covering foreign investment and its local treatment are found in the following
legislation:-
i) “The Promotion of Investment Act (MPIA) of 1986”;
ii) “The Industrial Co-ordination Act (ICA) of 1975”;
iii) “The Foreign Investment Committee Guidelines(FIC)”;
i) “The Promotion of Investment Act (MPIA) of 1986”
This enactment is most important national law governing foreign investment in
Malaysia. It deals with foreign investment subject in most subtle way. It starts with
preamble4, which says as under:-
“An act to make provision for promoting by way of relief from income tax the establishment and development in Malaysia of industrial, agricultural and other commercial enterprises, for the promotions of exports and for incidental and related purposes.”
Part I of the statue provides for preliminaries, construction and commencement.
This legislation was in essence an extension to the Income Tax Act, 1967 of the
Malaysia5. Section 2 deals with definition clause. It provides comprehensively, the entire
terminology used in the regulation. The term “company/corporation” has been defined
under the heading “high technology”, which means “high technology Company” means a
company engaged in a promoted activity or in the production of a promoted product in
areas of new and emerging technologies”. This definition clause also designates area of
business activity and has prioritized it with the name of “pioneer business”, which says as
under: -
“Pioneer business, means the business of a pioneer company relating to a promoted activity or promoted product of the company which is carried on by it in its tax relief period”;
3 World Socialist Website. John Roberts. (2009, July 24). Malaysian govt. alters ethnic-based investment laws. Retrieved from World Socialist Website: https://www.wsws.org/en/articles/2009/07/mala-j24.html 4 See Preamble, it was promulgated on 1st January, 1986 with the Authority of President and Prime Minister of Malaysia. 5 See section 1 of the Act.
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Likewise, pioneer company has also been used to set up a concern in relation to
promoted activity or promoted product with the period of tax relief period. The promoted
activity and promoted product has also been defined in interpretation clause as under: -
“promoted activity, means a manufacturing, agricultural, integrated agricultural, hotel, tourist or other industrial or commercial activity determined by the Minister in accordance with section 4 and includes the activity referred to in section 4A,4B or subsection 5(1A)”;
“promoted product” means any product determined by the Minister in accordance with section 4 and includes the product referred to in sections 4A, 4B or subsection 5(1A)”;
Whether any business activity or product falls within the definition of promoted
activities or promoted products are first to be determined under section 4 of the Act. The
criteria in this regard is specified in this section. The Minister of International Trade and
Industry is assigned the task to name business activities to be included in these promoted
list. For this purpose, a list is prepared and published in the officials’ Gazette of
Malaysia. The Guidelines for determination to the Minster is also provided in sub section
(3) if section 4, which are as follows:-
(3) In exercising his powers under subsection (1), the Minister may take into consideration the following
(a) whether or not any activity is being carried out or any product is being produced in Malaysia on a commercial scale suitable to the economic requirements or development of Malaysia or at all; or
(b) Whether there are—
(i) favourable prospects for further development of the activity or product; Or;
(ii) Insufficient facilities in Malaysia to enable the activity to be carried out or a product to be produced on a commercial scale suitable to the economic requirements”.
Some of business activity or product can also be included by the Minster, which
according to him is of national and strategic importance to Malaysia. The Minster is also
empowered to determine “promoted areas” within the meaning of section 4C. Section 5
talks about conferring pioneer status to the company. It says that any company or foreign
national intends to set up a company, must first of all shows that the business activity or
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product is covered under promoted activity or promoted product. Thereafter, he would
apply for pioneer status in writing. Such application would be granted pioneer status
under section 6 of the Act if he is satisfied that it is expedient in the public interest to do
so, having regard in particular to the number of pioneer companies already established,
the production of the said companies favorable prospects of further development of
promoted activity or promoted product, on fulfillment of criteria, the Minster then grants
pioneer status to the activity or product. Followed by grant of pioneer status, pioneer
certificate would be issued within six months from the date of grant6. Such company
requesting for certificate shall state the marketable quantities of promoted product, the
date on which factory commenced the production and absence of above conditions, the
reasons thereof7. Under section 7(3), the Minster then would issue the certificate to the
company to be a pioneer company. Likewise, the granting of pioneer certificate can also
be revoked, if the conditions under section 7(1) to (3) are not full filled8. Prior to
cancellation, the delinquent company would be served a show cause notice under section
9 of the Act. Once the certificate is cancelled, the cancellation would be effective from
the date when the pioneer certificate first became operative. A pioneer company can also
apply for additional promoted activity or promoted product in accordance with section 5
of the Act9. Under section 14, tax relief period has been specified. It shall begin on its
production day and continue for a period of five years, extendable by further period in the
opinion of Minster. Section 19 provides for hotel building to the industrial building. It
says that where pioneer company has incurred expenditure on the hotel building or
incurred capital expenditure modernizing an activity hotel building as per standard of
Malaysia.
The income of a pioneer company shall be computed in accordance with the
principal Act of Income Tax under section 21 to 25. Under section 26, special tax
allowance is given to pioneer company on the evidence that it has participated or intends
to participate for production of promoted product. Afterwards, provisions regarding
special tax allowance has been enumerated in the Act subject to the approval of the
6 See section 7(1) of the Act. 7 See section 7(2) of the Act. 8 See section 8 of the Act. 9 See section 10 of the Act.
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Minister. From section 27A to 29H, the procedure and treatment of such application at
Ministry level have been detailed. Section 31 of the Act provides for tax allowance for
agriculture, reconstruction or amalgamation, the separate chapter 2A has been inserted in
the name of “Industrial Adjustment Allowance” for giving tax relief10. Five percent
abatement in assessment is also given to the company, if it adjusts income in respect of
that business instead of withdrawing it11. Likewise, section 33 provides for abatement
for small scale companies and section 33A talks about abatement of adjusted income for
compliance with govt. policy. Whereas, section 35 lays down law relating to abatement to
be exempted from income tax. Incase of exports of product manufactured, 25% of export
sales or total sales is given to pioneer company12, which would be withdrawn, incase of
the same product is relanded in Malaysia. The Chapter 7 relates to “infrastructure
allowance”, which is given on construction, reconstruction, extension or improvement of
permanent structure in a promoted area, which shall be exempted from tax (Section.41B).
The production and company output is also regulated by section 42 of the Act, where any
public officer authorized in writing from Minister of Finance, access to company and its
facilities.
ii) The Industrial Co-ordination Act (ICA) of 1975
The purpose of this enactment was coordination and development of
manufacturing activities in Malaysia. This legislation has also contains provisions for
setting up of Industrial Advisory Council on this law. The legislation was enacted in
1975. Section 2 provides for definitions of terminologies used in the law. Manufacturer
has been defined as under:-
Manufacturer, means a person who is engaged in any manufacturing activity”;
Whereas, the manufacturing activity has been defined as under: -
manufacturing activity, with its grammatical variations and cognate expressions means the making, altering, blending, ornamenting, finishing or otherwise treating or adapting any article or substance with a view to its use, sale, transport, delivery or disposal and includes the assembly of parts and ship
10 See section 31A to 31E of the Act. 11 See section 32 of the Act. 12 See section 36 of the Act.
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repairing but shall not include any activity normally associated with retail or wholesale trade;
Under section 3, every individual or company who intends to carry out
manufacturing activity needs license for such activity. Non-obtaining of license has been
made punishable under section 3(2). The licensing officer is public officer, who issues
licenses to the manufacture and he is appointed by Prime Minster under section 3A of the
Act. Section 4 regulates the grant of license by licensing officer. The manufacturing
license may also be revoked, if the manufacturer has violated following conditionalities13
(section 6)
a) Has not complied with any condition imposed in the license;
b) Is no longer engaged in the manufacturing activity in respect of which the
license is issued; or
c) Has made a false statement in his application for the license.
Prior to revocation of license, show cause is issued14. The license likewise can be
transferred subject to prior approval of the licensing officer in the event of death,
incapacity, bankruptcy, liquidation of company. Section 7A prohibits production of any
product other that specified in the license. This enactment is promulgated
notwithstanding any other law enforced for manufacturing activity15. Under section 10,
every manufacturer in the opinion of licensing officer would furnish him information for
manufacturing activity and failure thereof is made punishable under section 10(2). Under
section 11A, an Advisory Council with the name and style of “Industrial Advisory
council” would be established to give advices to the Minister on this Act. Subsection (2)
thereof provides for members of such council. Against grant of license and revocation,
the appeal lies to the Minister16 and during pendency of appeal, the license shall continue
to be in force till the disposal of appeal. Once the license is revoked, the Minister would
publish it in official gazette.
13 See section 6 of the Act. 14 See section 5(2) of the Act. 15 See section 8 of the Act. 16 See section 13 of the Act.
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iii) The Foreign Investment Committee Guidelines (FIC)
Under these guidelines, the govt. of Malaysia has regulated acquiring of movable
and immovable properties by foreign individuals/companies. These guidelines are
important as they relate to transfer and exchange of properties to foreigner or foreign
companies, therefore, separate treatment has been provided for this subject. The salient
features of the guidelines are as under:-
a) Acquiring of properties under “Malaysia My Second Home Programme”
Every purchase of property for construction of residential unit is exempt from
“FIC” approval, if it is purchased under above program. All kinds of residential
properties are allowed, except properties having quota based, such as agricultural land,
“Malay reserve Land”. Such acquisition of properties by foreigner are also subjected to
the discretion of the concerned authority. Foreigner or seller is required to apply to
“Ministry of Tourism” for approval of such transaction.
b) Categories of properties other than residential accommodation
All other properties not falling under the stays program in Malaysia would be
approved subject to FIC’s discretion. In such cases, every purchase would be Rs.2,50,000
and incase of “Sarawak”, it should be more than 3,50,000 RM.
c) Acquisition of properties by Foreign concerns
Properties of foreign nationals are transferrable to their nearest family members
only. Under FICs guidelines, the family members are husband, wife, blood relations and
legally adopted children. Furthermore, Transfer of properties, if affected through court
order/will is exempted from FIC’s approval.
d) Procedure for acquiring residential accommodation under “Malaysia My
Second home Programme”
The acquisition of property under this program would go through following criteria:-
i) Identification of property;
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ii) Properties are eligible who have been issued certificate of Fitness (CF);
iii) Information seeking in relation to property from relevant authorities;
iv) Get the legal documentation done;
v) Letter from ministry of Tourism testifying that the acquirer has applied under
the program.
e) Commercial Buildings
Acquisition of commercial buildings by foreign nationals need FIC approval.
Such acquisition would be less than RM 10m without the condition of incorporation of
local company. Provided further that such property is for its own use only. Foreigners are
prohibited to buy/purchase following commercial buildings;
Double/single story houses
Low cost shop houses
Stalls
Commercial buildings on Malay reserve land
Shop houses of 3 story or above worth at least RM 500,000.
Incase of disposal of properties, certain conditions must be adhered to while dealing
with such properties to foreigners. Namely, prior to selling any properties to foreigner,
approval from FIC is required. All legal documentations including S & P agreement with
buyer would be prepared. Information regarding transaction would be sent to concerned
authorities i.e. ”FIC, Ministry of Tourism, Inland Revenue Board” in relation to such
disposed of properties. Payment of property tax would be paid to Inland Revenue Board.
3. Malaysian Investment Policy
In order to understand the investment environment of any country, its investment
policy should be looked into, including institutional and national law on the subject.
Malaysia with a growing partnership with “ASEAN” and “OECD”, it is becoming a
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strong region for investment. Investment related Policy Framework is the key to make
Malaysia as one of leading emergent investment friendly country, which is no doubt has
played a vital role in economic diversification of the country. Due to this framework, the
Malaysian companies are contributing both nationally and internationally as a outsource
investment destination to meet the country’s target of “developed country” till 2020
(OECD, 2016)17.
Tremendous economic performance, the Malaysia has transformed itself from
Agricultural economy from 1950 to that of an industrialized economy till now. Malaysia
is the major hub of inward foreign investment. Malaysia with its poverty level high
started from scratch as a status of agricultural economy has become a diversified open
economy. Now, poverty in Malaysia is visually eradicated. Since, 2009, Malaysia has
liberalized its regulation for foreign investment in service sector. With these aims, the
govt. has also removed “Guidelines of the Foreign Investment Committee” making it
only restrictive to few investments in the property. Intellectual property is given due
consideration by announcing “National IP Policy”, and the creation of IP Courts. New
Corporate Governance code was issued in 2012 to avoid economic disaster like “Asia
Financial Crisis”. GDP per capita is now much more that it was in 1980. Malaysia is now
second richest country in “ASEAN” after Singapore. Malaysia was also early export led
developer. Foreign investments are pouring in manufacturing Sector so also electronic
sector and it now stands at 82% of the capital in approved projects in 2012. According to
“UNCTAD 2015 World Investment Report”, Malaysia is fifth largest recipient of FDI
inflows in the world. Malaysia is one of 15 countries most favoured by multinational
companies in 2015-17.
Investment policy of Malaysia centers on promoting country’s industrial
development in which the country’s main regulator is “Malaysia Industrial Development
Authority, MIDA”. Prior to opening up, Malaysian Industrial Policy focused on
supporting exporting industries. The foreign companies in the countries was limited to
export industries. Due to these restrictions, the inflows of FDI slowed. In late 1990s,
17 OECD. (2016, August 01). Malaysia - OECD Investment Policy Review. OECD Publications. Retrieved from OECD website: http://www.oecd.org/investment/investment-policy/malaysia-investment-policy.htm
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these restrictions were done away. In mid-1980s, the incentives were given by the govt.
to specific investment project, which was gradually increased sanctioning it to 12
industries made public through “First Malaysian Industrial Plan”. Lateron, these
incentives seen change depending on the priorities needed in only specified sector. These
sectors included “high technology industries, research and development, development of
human resources, development of industrial linkage and manufacture of machinery and
equipment. Malaysia Investment Policy is the main reasons to make the country wealthier
to some extent. The guarantee to the investment is also ensured to the foreign investor by
payment of compensating by virtue of Article 13 of Federal Constitution.
Now, the national law of Malaysia on foreign investment is incomplete, but
Malaysia has adopted a novel way to overcome such defect by depending on BITs to
provide protections to foreign investors in case of preemption. A large FDI flows show
that they are reinvested investment proceeds, which show that foreign investors have
remained in Malaysia as matter of choice. Malaysian govt. has launched the “New
Economic Model, NEM” to shift Malaysia from upper middle income country of US
$7500 per capita to US$ 15000 by 2020. NEM includes various programs whereby
private sector are targeted to make Malaysia more competitive for foreign investment.
These programs comprise of investment related incentives, boost in private investment by
improving the business climate and improvement in the roles of public and private
sectors (Ministry of Foreign Affairs, 2016)18.
Malaysia has also launched its 10th Malaysian Plan (2011-2015) and Economic
Transformation Programme (ETP) for facilitation of foreign investment, whereby it was
intended that GDP of 6.0% per annum in the next five years would be achieved. Through
ETP, twelve “National Key Economic Areas, NKEA” have been identified affecting
economic growth to Malaysian economy. These are “oil, gas and energy; palm oil and
related products; financial services; wholesale and retail; tourism; communications
content and infrastructure; education; electrical and electronics; business services, health
care; agriculture and greater Kuala Lumpur”. The MIDA is tasked by the govt. to achieve
18 Ministry of Foreign Affairs, Malaysia. (2016, 01 August). Malaysia, A Top Value Destination for Investment. Retrieved from Ministry of Foreign Affairs website: http://www.kln.gov.my/web/ita_rome/n2012/-/asset_publisher/ME2g/blog/malaysia:-a-top-value-destination-for-investment?redirect=%2Fweb%2Fita_rome%2Fn2012%2F-%2Fblogs
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these targets for purposes of promotion of investment in sectors falling in “Non-National
Key Economic Areas, (NKEAs)”, like aerospace, machinery and equipment, medical
devices, transport equipment; and advance materials.
The Malaysia has now turned to adopt a more refined and targeted approach in
attaining investment. It has started to focus on high technology sectors to maintain the
economic growth of Malaysian economy. Keeping in view this aspiration, MIDA is
focusing on investments in high value added industries. The largest investment is coming
from Italy in Malaysia. Let alone in 2011, total 55 projects with the investment of US$
183.5 million were set-up in Malaysia. These investments were “rubber products,
machinery and equipment, electronics and electrical products and wood and wood
products”. The present economic growth in Malaysia is also due to sustenance of political
stability, liberal investment policies, cost competitiveness, well-developed infrastructure,
strong supporting industries and services, productive workforce”. At present, as much as
8000 foreign companies are present in Malaysia. Most of them expanded their operation
showing that they are confident on country as an investment destination.
4. Model BIT of Malaysia
Malaysian Model for BIT was first adopted in 1998 with the purpose of
“Promotion and Protection of Investments” (UNCTAD, 2016).19 The preamble of
agreement says that in order to “expand and strengthen economic and industrial
cooperation on a long term basis“, this agreement is being executed. The investments
under the model template is allowed for promotion of economic wellbeing of both states.
Article I is “definition’ clause, in which the definition of “investments”, “investor”, and
“territory”, etc. are provided, these are as under: -
(a) Investments, means every kind of asset and in particular, though not exclusively,
includes:
(i) Movable and immovable property and any other property rights such as
mortgages, liens or pledges;
19 UNCTAD. (2016, July 29). Malaysia. Retrieved from UNCTAD website: http://investmentpolicyhub.unctad.org/IIA /CountryIris/127#iiaInnerMenu
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(ii) Shares, stocks and debentures of companies or interests in the property of
such companies;
(iii) A claim to money or a claim to any performance having financial value;
(iv) Intellectual and industrial property rights, including rights with respect to
copyrights, patents, trademarks, tradenames, industrial designs, trade secrets,
technical processes and know-how and goodwill
(v) Business concessions conferred by law or under contract, including
concessions to search for, cultivate, extract, or exploit natural resources;
(b) Investor means:
(i) any natural person possessing the citizenship of or permanently
residing in the territory of a Contracting Party in accordance with its
laws; or
(ii) any corporation, partnership, trust, joint-venture, organization,
association or enterprise incorporated or duly constituted in accordance
with applicable laws of that Contracting Party;
(c) Territory means:
(i) with respect to Malaysia, all land territory comprising the Federation
of Malaysia, the territorial sea, its bed and subsoil and airspace above;
(ii) with respect to the....................................................................…........
..................................................................................................................
..................................................................................................................”
Article 2 relates to “promotion and protection of investments”. According to this
clause, every investment would be allowed and treated by either party according to its
law, regulations and national policies. “Equitable and adequate protection” is also
ensured in this Article by emphasizing full and all times protection and security to the
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investment by either state. Article 3 says that investment of contracting party shall always
be treated at par with the treatment provided to investors of any other contracting state
with whom Malaysia has BIT arrangement. In other words, Most favored Nation
treatment is provided under model template. But this clause has its own limitation
provided in sub article (2), which says that treatment of similar nature to the investor of
this agreement shall not include any other economic relationships of Malaysia arising
from different block, unions or any other forms of regional alliance. This limitation is
reproduced as under for the sake of understanding:-
(a) any existing or future customs union or free trade area or a common market or a monetary union or similar international agreement or other forms of regional cooperation to which either of the Contracting Parties is or may become a party; or the adoption of an agreement designed to lead to the formation or extension of such a union or area within a reasonable length of time; or
(b) any international agreement or arrangement relating wholly or mainly to taxation or any domestic legislation relating wholly or mainly to taxation.
Under Article 4, compensation would be granted to the investors, if his
investment suffers loss arising from “war or other armed conflict, revolution, state of
national emergency, revolt, insurrection or riot” within the frontiers of other state. Article
5 defines “expropriation” and the places, where it is permissible and can be resorted to by
the investor. Expropriation and nationalization of foreign investments is strictly
prohibited except in case of measures of lawful purpose, public purpose or measures
under due process of law or measures of non-discriminatory nature. Likewise, if decision
of expropriation is taken, then the aggrieved investor would be provided with quick and
“adequate and effective compensation” equivalent to market value of assets. Furthermore,
incase of delay in compensation, the same would carry interest obligation payable to the
aggrieved investor by the host party.
Article 6 stipulates transfer of investment proceeds/funds, that would be free and without
any hindrance. The transfer of following proceeds are allowable under the model:
(a) the net profits, dividends, royalties, technical fees, interest and other current income, accruing from any investment of the investors of the other Contracting Party;
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(b) the proceeds from the total or partial liquidation of any investment made by investors of the other Contracting Party;
(c) funds in repayment of borrowings/ loans given by investors of one Contracting Party to the investors of the other Contracting Party which both Contracting Parties have recognized as investment; and
(d) the net earnings and other compensations of national of one Contracting Party who are employed and allowed to work in connection with an investment in the territory of the other Contracting Party.
Such transfer would also be accorded “Most Favoured Nation” treatment under
Article 6(3). Article 7 provides for resolution of disputes arising of investment. Such
resolution would be under auspices of “ICSID” on the two points, namely “obligation as
to investment” and “breach of right conferred by this agreement”. The provisions of
article further says that resolution through diplomatic channels would only be used, if the
ICSID does not have jurisdiction to decide the dispute. Secondly, the other party has
failed to make compliance with the award passed by the tribunal against that party. In
case of any disputes arising out of agreement is in relation to interpretation and
applicability of agreement, the same would be resolved through diplomatic channels
under Article 8 and on failure thereof, the dispute would be referred to Tribunal to be
constituted comprising of two members nominated by each party. After their
appointment, a neutral third state national would be selected by both of members, who
would also be approved by both parties hereinabove. Such national would be Chairman
of the Tribunal. If no appointment like above is made, then International Court of Justice
would be called upon to intervene to make such appointments. By virtue of Article 10,
applicability of the agreement is restricted to investments made in the territorial
boundaries of either states and too subject matter of this agreement. Amendment in the
agreement is also permissible with the consent of both parties under Article 10. The life
of the agreement is restricted to ten years.
5. International Agreements and Bilateral Investment Treaties of Malaysia
Malaysia to date has a comprehensive international investment agreement regime.
It is signatory to 71 BIT with different countries of all subcontinents including countries
from major economic bloc. Out of which 59 are full in force, whereas, 12 were signed but
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are not in force and one BIT with Indonesia is terminated (UNCTAD, 2016)20. There are
several (almost 24) “Treaties with Investment Provisions, TIPs”, out of which four are
not in force. There are 24 “Investment Related Investments, IRIs” also, which shows
richness of Malaysia as an international state in international investment regime.
Protecting foreign investment is top priority issue at the national level in
Malaysia. Protection to foreign investment in Malaysia is provided to investors of
countries, where the Malaysia has bilateral arrangement of international treaties like
“Bilateral or Multilateral Treaties”. The history of signing of BIT by Malaysia starts from
1960, where it signed its first ever investment agreement with the Republic of Germany
(Skrine and Faizah Jamaluddin)21. Since then, the Malaysia has executed as many as 68
BITs. One important fact in most of BITs of Malaysia is that unlike Pakistan, 39 BITs
were publically available at the time of writing for comments and feedbacks. The unique
aspect of these publically available BITs are that they primarily concerned with broad
definition of investment and had “fair and equitable treatment” provisions binding on
both contracting state and prospective investors as well as their investment. In these, BIT,
it was ensured that arbitrary or discriminatory treatment of prospective investors and their
investments were prohibited. Generally, these publically BITs contained provisions for
“full protection and security” of investments of other treaty partner. Prohibition of
expropriation and nationalization is also strong in these BITs and it is allowed in
exceptionally extraordinary circumstances like measure of public importance that would
be too in accordance with due process of measures of law. Provided that such extreme
measures would be visited by “prompt, adequate and effective compensation”.
Overview of most of Malaysia BIT reveals that they also contain Most Favoured
Nation (MFN) clause, which means the treatment of investors from treaty party would be
at par with treatment provided to investors of third state. Nonetheless, in many BITs,
specific areas were excluded from this clause. These are as under:-
20 UNCTAD. (2016, July 29). Malaysia. Retrieved from UNCTAD website: http://investmentpolicyhub.unctad.org/ IIA/CountryIris/127#iiaInnerMenu 21 Skrine and Faizah Jamaluddin. (2016, July 30). Malaysia-Law and Practice. Chambers and Partners. Retrieved from http://www.chambersandpartners.com/guide/practice-guides/location/271/8102/2358-200
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i) “Customs Unions”
ii) “Free Trade Areas”
iii) “Common Markets”
iv) “Local or international legislation affecting taxation”
Apart from BIT regime, Malaysia has also concluded many “Multilateral
Investment Protection Treaties”. The leading one is “ASEAN Comprehensive Investment
Agreement, ACIA” enforced on 29-03-2012. Not to mention that, Malaysia is pioneer
member of “Association of Southeast Asian Nations, (ASEAN)”. The ACIA was
established for creation of a free and open investment environment by expansion of
existing agreement between ASEAN member states. They also contain numerous
investment protection provisions similar to those found in BITs. Like “Non-
discrimination”, “MFN treatment”, “fair and equitable treatment”, “full protection and
Security”, and “Expropriation”. Malaysia was also a member of “Asia Pacific Economic
Cooperation, APEC” (07-11-1991), “the Convention Establishing the Multilateral
Investment Guarantee Agency”, (06-12-1991) and “World Trade Organization” (01-01-
1995). Commercial dispute resolution in Malaysia is undertaken under “Arbitration act,
2005. This legislation is based on “UNCITRAL Model Law on International Commercial
Arbitration of 1985”. The jurisdiction under this Act is wide applying to both local and
international arbitration. Malaysia is also signatory to the “New York Convention 1958
and the Washington Convention of 1965 i.e. ICSID Convention”. ICSID awards and
arbitral awards are given under New York convention member states are enforceable in
Malaysia22. The following table shows the list of Bilateral Investment Treaties of
Malaysia: -
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No. Partner Country Signing Date Date of Entry into
Force
1. Albania 24-01-1994 29-03-1994
2. Algeria 27-01-2000 -
3. Argentina 06-09-1994 20-03-1996
4. Austria 12-04-1985 01-01-1987
5. Bahrain 15-06-1999 -
6. Bangladesh 12-10-1994 20-08-1996
7. BLEU (Belgium-
Luxembourg Economic Union)
22-11-1979
08-02-1982
8. Bosnia and Herzegovina 16-12-1994 27-05-1995
9. Botswana 31-07-1997 -
10. Burkina Faso 23-04-1998 18-08-2003
11. Cambodia 17-08-1994 -
12. Chile 11-11-1992 04-08-1995
13. China 21-11-1998 31-03-1990
14. Croatia 16-12-1994 19-07-1996
15. Cuba 26-09-1997 27-10-1999
16. Czech Republic 09-09-1996 03-12-1998
17. Denmark 06-01-1992 18-09-1992
18. Djibouti 03-08-1998 -
19. Egypt 14-04-1997 03-02-2000
20. Ethiopia 22-10-1998 04-06-1999
21. Finland 15-04-1985 03-01-1998
22. France 24-04-1975 01-08-1976
23. Germany 22-12-1960 06-07-1963
24. Ghana 08-11-1996 18-04-1997
25. Guinea 07-11-1996 24-02-1997
26. Hungary 19-02-1993 08-07-1995
27. India 01-08-1995 12-04-1997
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28. Indonesia 22-01-1994 27-10-1999
Terminated
29. Iran 22-07-2002 05-08-2006
30. Italy 04-01-1988 25-10-1990
31. Jordan 02-10-1994 03-03-1995
32. Kazakhstan 27-05-1996 -
33. Korea Democratic Republic 04-02-1998 17-10-1998
34. Korea Republic 11-04-1988 31-03-1989
35. Kuwait 21-11-1987 -
36. Kyrgyzstan 20-07-1995 -
37. Lao People’s Republic 08-12-1992 -
38. Lebanon 26-02-1998 20-01-2002
39. Macedonia 11-11-1997 17-03-1999
40. Malawi 05-09-1996 -
41. Mongolia 27-07-1995 14-01-1996
42. Morocco 16-04-2002 23-04-2009
43. Namibia 12-08-1994 -
44. Netherlands 15-06-1971 13-09-1972
45. Norway 06-11-1984 07-01-1986 Terminated
46. Pakistan 17-07-1995 25-12-1995
47. Papua New Guinea 27-10-1992 -
48. Peru 13-10-1995 25-12-1995
49. Poland 21-04-1993 23-03-1994
50. Romania 26-11-1982 Terminated
51. Romania 25-06-1996 08-05-1997
52. San Mario 27-09-2012 -
53. Saudi Arabia 25-10-2000 14-08-2001
54. Senegal 11-02-1999 -
55. Slovakia 12-07-1997 -
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56. Spain 04-04-1995 16-01-1996
57. Sri Lanka 16-04-1982 31-10-1995
58. Sudan 02-08-1998 -
59. Sweden 03-03-1979 06-07-1979
60. Switzerland 01-03-1979 09-06-1978
61. Syrian Arab Republic 07-01-2009 03-05-2009
62. Taiwan 18-02-1993 18-03--1993
63. Turkey 25-02-1998 09-09-2000
64. Turkmenistan 30-05-1994 -
65. UAE 11-10-1991 22-05-1992
66. UK 21-05-1981 21-10-1988
67. Uruguay 09-08-1995 13-04-2002
68. Uzbekistan 06-09-1997 20-01-2000
69. Viet Nam 21-01-1992 09-10-1992
70. Yemen 11-02-1998 -
71. Zimbabwe 28-04-1994 -
Malaysia has not concluded BIT with US, yet is partner with US in “Trans Pacific
Partnership, (TPP)” in February, 2016. This is also multilateral agreement containing
important investment clauses, including investor-dispute settlement. Malaysia is also not
signatory to “Bilateral Investment Guarantee Agreements” with seventy states. The
country has seventy double taxation agreements with different countries (United States,
Department of Commerce, 2016)23.
6. Malaysian Investment Development Authority (MIDA)
Malaysia investment Development Authority (MIDA, 2016)24 is investment
facilitation center of Malaysian Govt. It is apex foreign investment regulator of the
country. It was incorporated in 1965 by an act of parliament i.e. “Malaysian industrial
Development Authority (Incorporation) Act, 1965”. It is the “Malaysian’s govt. principal
23 United States Department of Commerce. (2016, July 30). Malaysia-Bilateral investment Agreements. Retrieved from United States Department of Commerce website: https://www.export.gov/apex/article2?id=Malaysia-Bilateral-Investment-Agreements 24 Malaysian Investment Development Authority. (2016 August 01). About MIDA. Retrieved from Malaysian Investment Development Authority website: www.midagov.my/home/about-mida/posts/#
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agency for the promotion of the manufacturing and services sectors in Malaysia”. MIDA
is focal platform for the corporations and the business individuals alike for investment in
above sectors. It also facilitates joint venture and identify local of foreign partners to
companies. It also provides information relating to investments and policies of govt. to
stakeholders. For this purposes, senior govt. officials from different govt. agencies are
posted in the headquarters of MIDA to discharge its functions. They advise the investors
on govt. policies and information relating to investment. These officials include
representatives from “Department of Labor”, “Immigration Department”, “Royal
Malaysia Customs”, “Department of Environment”, “Tenaga Nasional Berhad” and
“Telekom Malaysia Berhad”. MIDA is also responsible for evaluation of application in
the manufacturing sectors on these matters:-
i) “Manufacturing licenses”
ii) “Expatriates posts”
iii) “Duty exemptions on raw materials and component”
iv) “Duty exemptions on machinery and equivalent for agricultural sector and
selected service sector”.
MIDA is govt. representative body in granting confirmation letter for claim of
exemption from “Malaysian Customs Department”. Its mission statement says “to ensure
Malaysia achieves its goals in economic transformation and tis aspiration of a developed
nation in 2020. As per its charter, MID has following key functions (The Wikipedia,
2016)25: -
a) “To promote foreign and local investments in the manufacturing and services
sectors.”
b) “To undertake planning for industrial development in Malaysia.”
c) “To recommend policies and strategies on industrial promotion and
development to the Minister of International Trade and Industry.”
d) “To evaluate applications for manufacturing licenses and expatriate posts; tax
incentives for manufacturing activities, tourism, R&D, training institutions
25 The Wikipedia, free encyclopedia. (2016, August 01). Malaysia Investment Development Authority. Retrieved from The Wikipedia, free encyclopedia website: https://en.wikipedia.org/wiki/Malaysian_Investment_Development_Authority
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and software development; and duty exemption on raw materials, components
and machinery.”
e) “To assist companies in the implementation and operation of their projects,
and offer assistance through direct consultation and consultation and co-
operation with the relevant authorities at both the federal and state levels.”
f) “To facilitate the exchange of information and co-ordination among
institutions engaged in or connected with industrial development.”
g) “To further enhance MIDA's role of assisting investors, senior representatives
from key agencies are stationed at MIDA's headquarters in Kuala Lumpur to
advise investors on government policies and procedures. These
representatives include officials from the Ministry of Human Resources,
Immigration Department, Royal Customs Malaysia, Department of
Environment, Tenaga Nasional Berhad and Telekom Malaysia Berhad.”
7. Legal Protection clauses to FDI under Malaysian BITs
Being a member of ASEAN, Malaysia has adopted the evolution for legal
protection to foreign investment slowly and steadily. It has also promulgated home
legislation in order to protect investment. All the members of ASEAN states are going
towards sound and consistent legal landscape in this regard. The OECD has termed it
“ASEAN WAY”. Malaysia has also included a number of legal guarantees for
investment in their national legislation, which is compliant to ASEAN Comprehensive
Investment Agreement (ACIA) (OECD, 2014)26. This legal protection is other than those
found in Bilateral Investment Treaties clauses in BITs signed with other countries by
Malaysia. Malaysia is the country with no comprehensive foreign direct investment legal
regime giving thereby an open field and advantage for its govt. to mould and screen out
FDI through policy decisions to accommodate their economic needs. Due to these policy
decisions, FDI is controlled under specific category of sector legislation. The protection
to investment is enshrined itself in the Constitution of Malaysia and in BITs.
26 OECD. (2014). Southeast Asia Investment Policy Perspective. OECD Publications. page 31.
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When it comes to national treatment of foreign investment, Malaysia provides for
national treatment of investment in restrictive manner. There is no mechanism under
Malaysian law for non-discriminatory treatment to global and national investment as no
provisions exist in the limited foreign investment legislation of Malaysia. This statement
should not be misunderstood as despite non-existence of such provisions, the foreign
investment are not treated discriminatorily nor it means that it is less protected. For
example, properties rights are protected under different legal regulation so also in
Constitution. Notwithstanding with non-existent of comprehensive investment legal
regime, the expropriation was sufficiently been dealt with as a part of Malaysian
Constitution and in IIAs. They contain provisions relating to expropriation in a more
pragmatic and in consistent manner, which shows that protection for nationalization or
expropriation is highly regarded by Malaysia. Under Articles of its Constitution, both
national and foreign investors are protected against expropriation in the absence of fair
compensation. Likewise, “The Land Acquisition Act”, restricts indefinite and uncertain
land expropriation. It sets out terms and conditions, whereby land property can be
expropriated.
Generally, under investment treaties regime, evolved over the time, certain
clauses are regarded as to providing protection to the investors. These are as under: -
1) “Protection from expropriation without compensation most favoured nations
provisions”;
2) “Most favoured nation provisions”;
3) “National treatment provisions”;
4) “Fair and equitable treatment”;
5) “Full protection and security”;
In order to study the above criteria in bilateral investment regimes of Malaysia, the
following five countries’ BITs with Malaysia would be explored to see protection clauses
in Malaysian BIT from time to time:-
i) Germany
ii) UK
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iii) India
iv) China
v) Turkey
i) Germany-Malaysian BIT
The BIT between Germany and Malaysia was concluded on 22-12-1960 between
two countries and was made effective from 06-07-1963. It was executed to achieve the
economic cooperation amongst two countries and to promote economic relation with
each other27. Article 1 stipulates investment, returns and nationality and companies.
Article 3 contains provisions regarding national treatment whereby, nationals of either
treaty partner would treat the national of each other at par with its own nationals. The
said Article is as under:-
Article 3
Unless specific stipulations made in the document of admission provide otherwise, neither Contracting Party shall subject in its territory nationals or companies of the other Contracting Party as regards their activities in connection with investments, including the effective management, use or enjoyment of such investments, to treatment less favourable than that accorded to its own nationals or companies or to nationals or companies of any third party as regards their activities in connection with investments.
Article 4 defines expropriation. In this BIT, expropriation in Malaysia would not
be conducted except for a public purpose and that too on the basis for “prompt, adequate
and effective compensation”. The said provision is in line with general principles of
investment treaties regime. The wordings of Article 4 runs as under:-
Article 4
1) The investments of nationals or companies of either Contracting Party in the territory of the other Contracting Party shall not be expropriated except for a public purpose, nor shall they be expropriated without prompt, adequate and effective compensation which shall be freely transferable between the territories of the two Contracting Parties. The legality of any such expropriation and the quantum of compensation shall be subject to review by due process of law in the territory of the Contracting Party in which the investment has been expropriated.
27 See Preamble of the Treaty.
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2) The provisions of paragraph (1) above shall likewise apply to returns from investments.
Article 10 of BIT relates to dispute resolution by referring the investment dispute
to private arbitral tribunal to be constituted in accordance with sub-clause 3. The
language of the said article is as under:-
ARTICLE 10:
1) Disputes concerning the interpretation or application of this agreement should, if possible, be settled by the Governments of the two Contracting Parties.
(2)If a dispute cannot thus be settled it shall, upon the request of either Contracting Party, be submitted to an arbitral tribunal.
(3) Such arbitral tribunal shall be established in each individual case, each Contracting Party appointing one member, and these two members shall then agree upon a national of a third party as their Chairman to be appointed by the Governments of the two Contracting Parties. Such members shall be appointed within two months. and such Chairman within three months, after either Contracting Party has made known to the other Contracting Party that it wants the dispute to be submitted to an arbitral tribunal.
(4) It the periods specified in paragraph (3) have not been observed, either Contracting Party may, in the absence of any other relevant arrangement, invite the President of the International Court of Justice to make the necessary appointment. If the President is a national of either Contracting Party or if he is otherwise incapacitated from discharging his function, the Vice–President should make necessary appointments. If the Vice-President is a national of either Contracting Party or if he too is incapacitated from discharging his function, the Member of the International Court of Justice next in seniority who is not a national of either Contracting Party should make the necessary appointments.
(5) The arbitral tribunal shall reach its decisions by a majority of votes. Such decisions shall be binding. Each Contracting Party shall bear the cost of its own member and of its counsel in the arbitral proceedings; the cost of the Chairman and the remaining cost shall be borne in equal parts by both contracting Parties. The arbitral tribunal may make a different regulation concerning costs. In all other respects, the arbitral tribunal shall determine its own procedure.
However, there are no other clauses exist regarding protection to investment and
fair and equitable treatment provisions in this BIT. This was perhaps because of the pre-
maturity of economic ties by the countries with each other.
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ii) UK-Malaysian BIT
This treaty was concluded on 21-05-1981 after twenty years of Germany-
Malaysian BIT and came into effect on 21-10-1988. Like all other BITs of Malaysia, this
treaty also starts with preamble of achieving the investments promotion and its
protection. Article 1 specifies investment and territories included in the treaty. Like
Germany-Malaysia BIT, the terms “returns”, “nationals” and “companies” are also
inserted. Article 2 contains provisions of “fair and equitable treatment” of investment
coming from and going to either treaty partner or the same shall not be subjected to
“unreasonable or discriminatory measures”. The Article runs as under:-
ARTICLE 2
(1) Each Contracting Party shall encourage and create favourable conditions for nationals or companies of the other Contracting Party to invest capital in its territory, and, subject to its right to exercise powers conferred by its laws, shall admit such capital.
(2) Investments of nationals or companies of either Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party. Neither Contracting Party shall in any way impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment or disposal of investments in its territory of nationals or companies of the other Contracting Party. 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.
Sub-clause (2) provides that both parties would ensure that the investments and
investors from each other treaty partner would be fully secured and safeguarded in their
limits. This stipulation is also in consonance with international investment treaties
regime. Article 3 relates to “Most Favoured Nation” treatment. Under this article, both
countries made it mandatory for each other that the same treatment as is provided to
investment of investor of any third country would also be provided to investment or
investors of treaty partner. These provisions also provides “national treatment status” in
equivocal terms. Sub-clause (3) says that incase of war, strife or national emergency, the
investment and investor would also be treated at par with investment or investor of third
party. The language of Article 3 is as under:-
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ARTICLE 3
(1 ) Neither Contracting Party shall in its territory subject investments or returns of nationals or companies of the other Contracting Party to treatment Iess favourable than that which it accords to investments or returns of its own nationals or companies or to investments or returns of nationals or companies of any third State.
(2) Neither Contracting Party shall in its territory subject nationals or companies of the other Contracting Party, as regards their management, use, enjoyment or disposal of their investments, to treatment less favourable than that which it accords to its own nationals or companies or to nationals or companies of any third State.
(3) Nationals or companies of one Contracting Party whose investments in the territory of the other Contracting Party suffer losses owing to war or other armed conflict, revolution, a state of national emergency. revolt, insurrection or riot in the territory of the latter Contracting Party shall be accorded by the latter Contracting Party treatment, as regards restitution, indemnification, compensation or other settlement, no less favourable than that which the latter Contracting Party accords to nationals or companies of any third State.
Article 4 talks about expropriation/nationalization of foreign investment. It says
that no investment shall be appropriated by means of expropriation by either treaty
partner except for a public purpose and that too on the payment of “prompt, adequate and
effective compensation”. Such compensation would be equivalent to fair market value.
Both expropriation and compensation would be determined by due process of law. Sub-
clause (2) further provides that the above provisions of clause (1) is also applicable incase
of expropriation of investment by treaty partner in respect to a company incorporated in
accordance with law of its own territory. Article 4 is reproduced as under:-
ARTICLE 4
I ) Investments of nationals or companies of either Contracting Party shall not be nationalized, expropriated or subjected to measures having effect equivalent to nationalization or expropriation in the territory of the other Contracting Party except for a public purpose related to the internal needs of the expropriating Party and against prompt, adequate and effective compensation. Such compensation shall amount to the value of the investment expropriated immediately before the expropriation or impending expropriation became public knowledge and shall be freely transferable. The legality of any such expropriation and the amount of compensation shall be determined by
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due process of law in the territory of the Contracting Party in which the investment has been expropriated.
2) Where a Contracting Party expropriates the assets of a company which is incorporated or constituted under the law in force in any pa r t of its own territory, and in which nationals or companies of the other Contracting Party own shares, it shall ensure that the provisions of paragraph (1) of this Article a r e applied to the extent necessary in respect of the shareholders of such a company.
Article 7 of the treaty unlike Germany-Malaysia BIT provides for disputes
settlement through ICSID arbitration. Both parties consented to ICSID and its procedure
for dispute resolution. The dispute resolution has been discussed in its entirety under this
clause. For better understanding, the provisions are detailed as under:-
ARTICLE 7
1) Each Contracting Party hereby consents to submit to the International Centre for the Sett1ement of Investment Disputes (hereinafter referred to as “the Centre ") for settlement by conciliation or arbitration under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States opened for signature at Washington on 8 March 1965' any legal dispute arising between that Contracting Party and a national or company of the other Contracting Party concerning an investment of the latter in the territory of the former. A company which is incorporated or constituted under the law in force in the territory of one Contracting Party and in which before such a dispute arises the majority of shares are owned by nationals or companies of the other Contracting Party shall in accordance with Article 2S (2) (b) of the Convention be treated for the purpose of the Convention as a company of the other Contracting Party. If any such dispute should arise and agreement cannot be reached within three months between the parties to this dispute through pursuit of local remedies or otherwise, then, if the national or company affected also consents in writing to submit the dispute to the Centre for settlement by conciliation or arbitration under the Convention, either party may institute proceedings by addressing a request to that effect to the Secretary-General of the Centre as provided in Articles 28 and 36 of the Convention. In the event of disagreement as to whether conciliation or arbitration is the more appropriate procedure the national or company affected shall have the right to choose. The Contracting Party which is a party to the dispute shall not raise as an objection at any stage of the proceedings or enforcement of an award the fact that the national or company which is the other party to the dispute has received in pursuance of an insurance contract an indemnity in respect of some of his or its losses.
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(2) Neither Contracting Party shall pursue through diplomatic channels any dispute referred to the Centre unless;
a) The Secretary-General- of the Centre, or a conciliation commission or an arbitral tribunal constituted by it, decides that the dispute is not within the jurisdiction of the Centre, or
b) The other Contracting Party should fail to abide by or to comply with any award rendered by an arbitral tribunal.
Dispute regarding interpretation or application have been detailed in Article 8 of
the treaty. The same mechanism resembles with dispute resolution mechanism between
two countries of Malaysian Treaty Model and that of Germany-Malaysia BIT. Article 8
says as under: -
ARTICLE 8
I) Disputes between the Contracting Parties concerning the interpretation or application of this Agreement should, if possible, be settled through diplomatic channels.
(2) If a dispute between the Contracting Parties cannot thus be settled, it shall upon the request of either Contracting Party be submitted to an arbitral tribunal.
(3) Such an arbitral tribunal shall be constituted for each individual case in the following way. Within two months of the receipt of the request for arbitration, each Contracting Party shall appoint one member of the tribunal. Those two members shall then select a national of a third State who on approval by the two Contracting Parties shall be appointed Chairman of the tribunal. The Chairman shall be appointed within thin two months from the date of appointment of the other two members.
(4) If within the periods specified in paragraph (3) of this Article the necessary appointments have not been made, either Contracting Party may, in the absence of any other agreement, invite the President of the International Court of Justice to make any necessary appointments. If the President is a national of either Contracting Party or if he is otherwise prevented from discharging the said function, the Vice-President shaIl be invited to make the necessary appointments. If the Vice-President is a national of either Contracting Party or if he too is prevented from discharging the said function, the Member of the International Court of Justice next in seniority who is not a national of either Contracting Party shall be invited to make the necessary appointments.
(5) The arbitral tribunal shall reach its decision by a majority of votes. Such decision shaIl be binding on both Contracting Parties. Each Contracting Party
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shaIl bear the cost of its own member of the tribunal and of its representation in the arbitral proceedings; the cost of the Chairman and the remaining costs shall be borne in equal parts by the Contracting Parties. The tribunal may, however, in its decision direct that a higher proportion of costs shall be borne by one of the two Contracting Parties, and this award shall be binding on both Contracting Parties. The tribunal shall determine its own procedure.
iii) India-Malaysian BIT
This BIT was concluded between two countries on 01-08-1995 and was made
effective on 12-04-1997. Like all other BITs of Malaysia, the purpose of the treaty is
defined to look after investment protection and promotion.. Article 1 is definition clause
contains the exhaustive definitions of “investment”, “returns”, “investors”, “national”,
“company”, “territory” and “free usable currency”. Article 2 is general clause for
protecting and promoting investment ties with each other. Sub clause (2) reiterates the
commitment of both countries to provide “full and adequate protection and security” in
their respective territories. Article 3 contains “national treatment, most favoured nation
and fair and equitable treatment” provisions to investment made by either country into
another country. The article is reproduced as under: -
ARTICLE 3
1. Investments made by investors of either Contracting Party in the territory of the other Contracting Party shall receive treatment which is fair and equitable, and not less favourable than that accorded to investments made by investors of any third state.
2. The provisions of this Agreement relative to the granting of treatment not less favourable than that accorded to the investors of any third State shall not be construed so as to oblige one Contracting Party to extend to the investors of the other the benefit of any treatment, preference or privilege resulting from:
(a) any existing or future customs union or free trade area or a common market or a monetary union or similar international agreement or other forms of regional cooperation to which either of the Contracting Party is or may become a party; or the adoption of an agreement designed to lead to the formation or extension of such a union or area within a reasonable length of time; or
(b) Any international agreement or arrangement relating wholly or mainly to taxation or any domestic legislation relating wholly or mainly to taxation.
3. Each Contracting Party shall, subject to its own laws, regulations and national policies, accord to investments of investors of the other Contracting Party
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treatment no less favourable than that which is accorded to investments of its own investors.
These provisions are similar to those found in international treaty regime. These
are also drawn as per Malaysia BIT model, which shows that Malaysia wants to develop
economic relationship with other countries on equal footings. When the compensation of
losses arising out of investment arises, it has been taken care under Article 4, which says
that investment losses arising from treaty would be treated at par with treatment with any
other third country or its own investors.
ARTICLE 4
Investors of one Contracting Party whose investments in the territory of the other Contracting Party suffer losses owing to war or other armed conflict, revolution, a state of national emergency, revolt, insurrection or riot in the territory of the latter Contracting Party shall be accorded by the latter Contracting Party treatment, as regards restitution, indemnification, compensation or other settlement, no less favourable than that which the latter Contracting Party accords to investors of any third State or to its own investors in accordance with its own laws, regulations and national policies.”
Article 5 relates to appropriation of investment assets by way of expropriation or
nationalization, which is again like all BITs of Malaysia would be conducted for public
purpose and in accordance with legal principles. Such expropriation would also be
subject to “prompt, adequate and effective compensation without delay”. The review
mechanism is given to investor to challenge the expropriation in a judicial or any other
authority of Contracting Party. For ease, this article is reproduced as under:-
ARTICLE 5
1. Neither Contracting Party shall take any measures of expropriation or nationalization or measures having effect equivalent to nationalization or expropriation (hereinafter referred to as expropriation”) against the investments of an investor of the other Contracting Party except under the following conditions:”
(a) The measures are taken for a lawful or public purpose in accordance with law
(b) The measures are non-discriminatory; (c) the measures are accompanied by provisions for the payment of adequate and effective compensation without undue delay. Such compensation shall amount to the market value of the investments affected immediately before the measure of dispossession became public
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knowledge, and it shall be freely transferable in freely usable currencies. Any unreasonable delay in payment of compensation shall carry’ an interest at prevailing commercial rate as agreed upon by both parties unless such rate is prescribed by law.
2. The investor affected shall have a right, under the law of the Contracting Party making the expropriation, to review, by a judicial or other independent authority of that Party, of his or its case and of the valuation of his or its investment in accordance with the principles set out in this paragraph. The Contracting Party making the expropriation shall make every endeavor to ensure that such review is carried out promptly.
3. Where a Contracting Party expropriates the assets of a company which is incorporated or constituted under the law in force in any part of its own territory, and in which investors of the other Contracting Party own shares, it shall ensure that the provisions of paragraph (1) of this Article are applied to the extent necessary to ensure fair and equitable compensation in respect of their investment to such investors of the other Contracting Party who are owners of those shares.
There are two provisions regarding settlement of investment disputes between
nationals and contracting parties. One is dispute in respect of interpretation and
application of provision of treaty, which catered for under Article 8, whereas, private
investment dispute between national and Contracting State is provided under Article 7.
This is because, as India is not signatory of ICSID Convention, therefore, no mention of
referring the dispute to ICSID tribunal, instead, private settlement tribunal is specified
under Article 7. We look into these provisions in a juxtaposition with each other to
understand the dispute settlement between the two countries:-
ARTICLE 7
1. Any dispute between an investor of one Contracting Party and the other Contracting Party in relation to an investment of the former under this Agreement shall, as far as possible, be settled amicably through negotiations between the parties to the dispute.
2. Any such dispute which has not been amicably settled within a period of six months may, if both Parties agree, be submitted:
(a) For resolution, in accordance with the law of the Contracting Party which has admitted the investment to that Contracting Party’s competent judicial or administrative bodies; or
(b) To international conciliation under the Conciliation Rules of the United Nations Commission on International Trade Law.
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3. Should the Parties fail to agree on a dispute settlement procedure provided under paragraph 2 of this Article or where a dispute is referred to conciliation but conciliation proceedings are terminated other than by signing of a settlement agreement, the dispute may be referred to Arbitration. The Arbitration procedure shall be as follows:
(a) if the Contracting Party of the Investor and the other Contracting Party are both parties to the Convention on the Settlement of Investment Disputes between States and Nationals of other States, 1965 and the Investor Consents in writing to submit the dispute to the international Centre for the Settlement of investment Disputes such a dispute shall be referred to the Centre; or
(b) if both parties to the dispute so agree, under the Additional Facility for the Administration of Conciliation. Arbitration and Fact-Finding Proceedings; or
(c) to an ad hoc arbitral tribunal by either party to the dispute in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law. 1976. subject to the following modifications:
(i) The appointing authority under Article 7 of the Rules shall be the President. the Vice-President or the next senior Judge of the International Court of Justice, who is not a national of either Contracting Party. The third arbitrator shall not be a national of either Contracting Party.”
(ii) The parties shall appoint their respective arbitrators within two months.
(iii) The arbitral award shall be made in accordance with the provisions of this Agreement.
(iv) The arbitral tribunal shall state the basis of its decision and give reason upon the request of either party.”
ARTICLE 8
1. Disputes between the Contracting Parties concerning the interpretation or application of this Agreement should, if possible, be settled through diplomatic channels.
2. If a dispute between the Contracting Parties cannot thus be settled, it shall upon the request of either Contracting Party be submitted to an arbitral tribunal.
3. Such an arbitral tribunal shall be constituted for each individual case in the following way. Within two months of the receipt of the request for arbitration, each Contracting Party shall appoint one member of the tribunal. Those two members shall then select a national of a third State who on approval by the two Contracting Parties shall be appointed Chairman of the tribunal. The Chairman shall be appointed within two (2) months from the date of appointment of the other two members.
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4. If within the periods specified in paragraph 3 of this Article the necessary appointments have not been made, either Contracting Party may, in the absence of any other agreement, invite the President of the International Court of Justice to make the necessary appointments. If the President is a national of either Contracting Party or if he is otherwise prevented from discharging the said function, the Vice-President shall be invited to make the necessary appointments. If the Vice-President is a national of either Contracting Party or if he too is prevented from discharging the said function, the member of the international Court of Justice next in seniority who is not a national of either Contracting Party shall be invited to make the necessary appointments.
5. The arbitral tribunal shall reach its decision by a majority of votes. Such decision shall be binding on both Contracting Parties. Each Contracting Party shall bear the cost of its own member of the tribunal and of its representation in the arbitral proceedings; the cost, of the Chairman and the remaining costs shall be borne in equal parts by the Contracting Parties. The tribunal may, however, in its decision direct that a higher proportion of costs shall be borne by one of the two Contracting Parties, and this award shall be binding on both Contracting Parties. The tribunal shall determine its own procedure.
iv) China-Malaysian BIT
The China-Malaysia BIT was first concluded on 21-11-1988 and was made
affective on 31-03-1990. The treaty statement was “reciprocal encouragement and
protection of investments”. Article 1 is definition clause, whereas the article 2 is general
provisions of reaffirmation of both contracting partner to ensure favourable conditions for
investment in their respective boundaries. Sub-clause (2) reiterates “full protection and
security” to the investment made by the investor from either Contracting party. Article 3
relates to “Most Favoured Nation Provisions in the following words:-
ARTICLE 3
(1) Investments made by investors of either Contracting Party in the territory of the other Contracting Party shall not be subjected to a treatment less favourable than that accorded to investments made by investors of any third State.”
(2) Investors of one Contracting Party whose investments in the territory of the other Contracting Party suffer losses owing to war or other armed conflict, a state of national emergency, revolt, insurrection or riot in the territory of the latter Contracting Party, shall be accorded by the latter Contracting Party treatment, as regards restitution, indemnification, compensation or other settlement, if any, no less favourable than that which the latter Contracting Party accords to investors of any third State.”
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Article 5 is expropriation clause and can take place in three ways by virtue of this
China-Malaysia BIT i.e. i) if the action is for public purpose, 2) if the action is not
discriminatory, 3) the action shall always be subject to payment of “fair and reasonable”
compensation and on the basis of market value. Article 5 runs as under:-
ARTICLE 5
(1) Neither Contracting Party shall take any measures of expropriation nationalization or any dispossession having effect equivalent to nationalization or expropriation against the investments of investors of the other Contracting Party except under the following conditions:
a) The measures are taken for a public purpose and in accordance with the legal procedure of each Contracting Party taking the expropriatory measures;”
b) The measures are non-discriminatory;
c) The measures are accompanied by provisions for payment of fair and reasonable compensation.
(2) Such compensation shall be computed on the basis of the market value of the investment immediately before the expropriation is proclaimed or become publicly known. Where the market value cannot be readily ascertained, the compensation shall be determined in accordance with generally recognized principles of valuation and on equitable principles taking into account, inter alia, the capital invested, depreciation, capital already repatriated, replacement value and other relevant factors. The compensation shall be freely transferable in freely convertible currency and be paid without unreasonable delay.
Article 7 provides for settlement of investment disputes which vests right of filing
complaint with the investor before the regulatory or other authority who has expropriated
investment, if the dispute is not resolved within one year thereof filing the complaint,
then the court of host or arbitration would be resorted to by the investor for reviewing the
amount of compensation. Secondly, the disputes or issues between national of one partner
and Contracting Party be settled amicably and on failure thereof, then the investor may
file complaint or file suit with the court of law or host state. Article 7 is as under:-
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ARTICLE 7
(1) If an investor challenges the amount of compensation for the expropriated investment, he may file complaint with the competent authority of the Contracting Party taking the expropriatory measures. If it is not solved within 1 year after the Complaint is filed, the competent court of the Contracting Party taking the expropriatory measures or an International Arbitral Tribunal shall, upon the request of the investor, review the amount of compensation.”
(2) Disputes or differences between one Contracting Party and an investor of the other Contracting Party concerning an investment of that investor in the territory of the former Contracting Party shall, if possible, be settled amicably.
(3) If such disputes or differences cannot be settled according to the provisions of paragraph 2 of this Article within a period of 6 months from the date either party requested amicable settlement and the parties have not agreed to any other dispute settlement procedures, the investor concerned may choose one or both of the following means of resolutions:
a) File complaint with and seek relief from the competent administrative authority or agency of the Contracting Party in whose territory the investment was made.
b) File suit with the competent court of law of the Contracting Party in whose Territory the investment was made.
(4) The dispute relating to the amount of compensation and any other disputes agreed upon by both parties may be submitted to an International Arbitral Tribunal. The International Arbitral Tribunal mentioned above shall be especially constituted in the following way; each party to the dispute shall appoint an arbitrator. The 2 arbitrators shall appoint an arbitrator as Chairman who shall be a national of a third State which shall have diplomatic relations with both Contracting parties. The arbitrators shall be appointed within 2 months and the Chairman within 4 months from the date when the concerned party notified the other party of its submission of the dispute to arbitration. If the necessary appointments are not made within the period specified in the previous paragraph, either party may, in the absence of any other agreement request the Chairman of the International Arbitration Institute of the Stockholm Chamber of Commerce to make the necessary appointments. The Arbitral Tribunal shall determine its own arbitral procedures by referring either to the Convention on the Settlement of Investment Disputed between States and Nationals of other States done at Washington on March 18, 1965 or the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL). The Arbitral Tribunal shall reach its award based upon the provisions of this Agreement, the relevant domestic laws, the agreements both Contracting Parties Have concluded and the generally recognized principles of International law. The Arbitral Tribunal shall meet in a third State selected by common accord by the parties concerned or, if the choice has not been made within 45 days of the appointment of the final
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member of votes. The award shall be final and binding on both parties. When the Tribunal renders an award, it shall state its legal basis and, upon request of either party, shall interpret it. Each party shall bear the costs of the arbitrator it has appointed and of its own expenses during the arbitration proceedings. The expenses of the chairman of the Tribunal and other costs shall be borne equally by both parties.
(5) In addition to the foregoing provisions of this Article, disputes between investors of a Contracting Party and the investors of the other Contracting Party in whose territory the investment was made may be settled by international arbitration in accordance with the arbitration clause between the parties.
(6) Neither Contracting Party shall pursue through diplomatic channels any Matter referred to arbitration until the proceedings have terminated and a Contracting Party has failed to abide by or to comply with the award rendered by the Arbitral Tribunal.”
Likewise, Article 8 provides for inter-state disputes settlement between countries
regarding interpretation and application of treaty, which can always be resolved through
diplomatic channels, if no decisions is made, the private arbitral tribunal to be constituted
in terms of sub-clause (3), (4) and (5) of Article 8. Article 8 is reproduced as under:-
ARTICLE 7
(1) Disputes between the Contracting Party concerning the interpretation or application of this Agreement should, if possible, be settled through diplomatic channels.
(2) If a dispute between the Contracting Party cannot thus be settled within 6 months, it shall upon the request of either Contracting Party be submitted to an Arbitral Tribunal.
(3) Such an Arbitral Tribunal shall be constituted for each individual case in the Following way: Within 2 months of the receipt of the request for arbitration, each Contracting Party shall appoint 1 member of the Tribunal. Those 2 Members shall then select a national of a third State who an approval by the two Contracting Parties Shall be appointed Chairman of the Tribunal. The Chairman shall be appointed within 2 months from the date of appointment of the other 2 members.
(4) If within the periods specified in paragraph 3 of this Article the necessary appointment have not been made, either Contracting Party may , in the absence of any other agreement, invite the President of the International Court of Justice to make any necessary appointments. If the President is a national of either Contracting Party or if he is otherwise prevented from discharging the said function, the Vice-President shall be invited to make the necessary appointments.
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If the vice-President is a national of either Contracting Party or if he too, is prevented from discharging the said function, the member of the International Court of Justice next in seniority who is not a national of either Contracting Party shall be invited to make the necessary appointments.
(5) The Arbitral Tribunal shall determine its own procedure. The tribunal shall reach its decision in accordance with the provisions of this Agreement and generally accepted principles of international law. The Tribunal shall reach its award by a majority of voted, such award shall be final and binding on both Contracting Parties. The Tribunal shall, upon the request of either Contracting Party, explain the basis of its award.
(6) Each Contracting Party shall bear the cost of its appointed arbitrator. The relevant costs of the Chairman and the Tribunal shall be borne in equal parts by the Contracting Parties.
v) Turkey-Malaysia BIT
This BIT was concluded on 25-02-1998 and was made effective on 09-09-2000.
The BIT starts with the title of reciprocal promotion and protections of investments
between two countries. The preamble of treaty says that both countries are keen to further
economy and industrial advancement through shared cooperation. Article 1 relates to
definitions clause as usually found in all Malaysia BITs. These terminology includes; i)
“investments”, “returns”, “investor”, “territory” and “free usable currency”. All those
investments are allowable in each other territory that is backed by national rules and
regulations of treaty partner. The clause 2 is general clause reaffirming the commitments
of both countries for creation of suitable condition for investments with their respective
boundaries as per existing laws and rules. Sub-clause (2) provides for equitable treatment
and would be accorded full and adequate protection and security. Article 3 specifies
“Most Favoured Nation” provisions, which protects the rights of investors by giving
similar treatment as accorded to investors of any third country. The said Article 3 is
reproduced as under:-
ARTICLE 3
1. Investments made by investors of either Contracting Party in the territory of the other Contracting Party shall receive treatment which is fair and equitable, and not less favourable than that accorded to investments made by investors of any third State.
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2. The provisions of this Agreement relative to the granting of treatment not less favourable than that accorded to the investors of any third State shall not be construed so as to oblige one Contracting Party to extend to the investors of the other the benefit of any treatment, preference or privilege resulting from:
(a) any existing or future customs union or free trade area or a common market or a monetary union or similar international agreement or other forms of regional cooperation to which either of the Contracting Parties is or may become a party; or the adoption of an agreement designed to lead to the formation or extension of such a union or area within a reasonable length of time; or
(b) any international agreement or arrangement relating wholly or mainly to taxation or any domestic legislation relating wholly or mainly to taxation:
Article 4 is compensation clause, and it gives the detailed events, where the
investment of investors would be compensated in the event of war, armed conflict,
revolution, a national emergency. The principles of fair and equitable treatment is also
specified under this clause. Any compensation to investments of either treaty partner
shall be on equal footing as extended to the investor of any third country. For
understanding, the Article 4 is reproduced as under:-
ARTICLE 4
Investors of one Contracting Party whose investments in the territory of the other Contracting Party. suffer losses owing to war or other armed conflict, revolution, a state of national emergency,. revolt, insurrection or riot in the territory of the latter Contracting Party shall be accorded by the latter Contracting Party treatment, as regards restitution, indemnification, compensation or other settlement, no less favourable than that which the latter Contracting Party accords to investors of any third State.”
Article 5 is expropriation clause. Under this clause, the expropriation has slightly
different been defined. The expropriation or nationalization can be conducted in three
way i.e. i) if it is intended for public purpose, ii) if the expropriation is not discriminatory,
iii) if the expropriation is necessarily to be conducted, then it shall be repayable through
compensation without any hurdles and delays. Article 5 runs as under:-
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ARTICLE 5
Neither Contracting Party shall take any measures of expropriation or nationalization against the investments of an investor of the other Contracting Party except under the following conditions:”
(a) The measures are taken for a lawful or public purpose and under due process of law;
(b) The measures are non-discriminatory;
(c) The measures are accompanied by provisions for the payment of prompt, adequate and effective compensation. Such compensation shall amount to the fair market value immediately before the measure of dispossession became public knowledge. Such market value shall be determined in accordance with internationally acknowledged practices and methods or, where such fair market value cannot be determined, it shall be such reasonable amount as may be mutually agreed between file Contracting Parties hereto & it shall be freely transferable in freely usable currencies from the Contracting Party. Any unreasonable delay in payment of compensation shall carry an interest at prevailing commercial rate 'as agreed upon by both ‘parties unless 'such rate is prescribed by law.
Article 7 is dispute resolution clause between a national and treaty partner. First,
disputes resolution mechanism is provided through consulting and negotiating processes
within six months, or failure thereof, the investor can claim following two remedies i.e. i)
resolution by competent court of law in host state and ii) resolution through ICSID. The
said article states as under:-
ARTICLE 7
1. Any disputes arising between a Contracting Party and an investor of the other Contracting Party which involve:
(a) an obligation entered into ·by that· Contracting Party with the investor of the other Contracting Party regarding an investment by such investor; or
(b) an alleged breach of any right conferred or created by this Agreement with respect to an investment by such investor, shall be resolved amicably through consultation and negotiation.
2. In the event that such a dispute cannot be settled amicably within six (6) months from the date of the written notification of such dispute, the investor may refer the dispute to either
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{a) the competent court of law of the Contracting Party in whose territory the investment was made; or
(b) the International Centre for the Settlement of Investment Disputes (hereinafter referred to as "the Centre") for settlement by conciliation or arbitration under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States opened for signature at Washington on 18 March 1965.
3. Each Contracting Party shall not pursue through diplomatic channels any dispute referred to arbitration unless:
(a) the Secretary-General of the Centre, or a conciliation commission or an arbitral tribunal constituted by it, decides that the dispute is not within the jurisdiction of the Centre; or
(b) the other Contracting Party should fail to abide by or to comply with any award rendered by an arbitral tribunal.
With regard to interpretation principles and applicability of treaty, the issues
would be resolved through diplomatic channels. On failure thereof, private tribunal in
terms of clause (3) and (4) of article 8 would hear and decide the dispute. This clause is
identical with all other clauses of Malaysian BIT, which shows coherence framework of
Malaysian authorities in drafting bilateral treaty. Article 8 is reproduced as under:-
ARTICLE 8
1. Disputes between the Contracting Parties concerning the interpretation or application of this Agreement should, if possible be settled through diplomatic channels.
2. If a dispute between the Contracting Parties cannot thus be settled, it shall upon the request of either Contracting Party be submitted to an arbitral tribunal.
3. Such an arbitral tribunal shall be constituted for each individual case in the following way. Within two (2) months of the receipt of the request for arbitration. Each Contracting Party shall appoint one member of the tribunal. Those two members shall then select a national of a third State who on approval by the two Contracting Parties shall be appointed Chairman of the tribunal. The Chairman shall be appointed within two (2) months from the date of appointment of the other two members.
4. If within the periods' specified in paragraph 3 of this Article the necessary appointments have not been made, either Contracting Party may, in the
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absence of any other agreement, invite the President of the International Court of Justice to make the necessary appointments. If the President is a national of either Contracting Party or if he is otherwise prevented from discharging the said function, the Vice-President shall be invited to make the necessary appointments. If the Vice-President is a national of either Contracting Party or if he too is prevented from discharging the said function, the member of the international Court of Justice next in seniority who is not a national of either Contracting Party shall be invited to make the necessary appointments.
5. The arbitral tribunal shall reach its decision by a majority of votes. Such decision shall be binding on both Contracting Parties. Each Contracting Party shall bear the cost of its own member of the tribunal and of its representation in the arbitral proceedings; the cost of the Chairman and the remaining costs shall be borne in equal parts by the Contracting Parties. The tribunal may, however, in its decision direct that a higher proportion of costs shall be borne by one of the two Contracting Parties, and this award shall be binding on both Contracting Parties. The tribunal shall determine its own procedure.
8. Famous Malaysian Cases at ICSID
Malaysia became the member of ICSID on 22-10-1965. The ICSID convention
was made affective from 14-10-1966 (ICSID, 2016)28. Since then, there are three cases
that were successfully concluded by ICSID. All these cases were filed against Malaysia.
These are as under:-
i) Malaysian Historical Salvors, SDN, BHD v. Malaysia29
ii) Phillipe Grusilin v. Malaysia30
iii) Phillipe Grusilin v. Malaysia31
The first case relates to salvage claim in respect of a British vessel carrier. The
brief facts are that the complainant company had executed an agreement with Malaysia
Govt. for salvaging the cargo loaded on the British vessel “DIANA”, which sank off in
the territorial waters of Malaysia in 1817. By virtue of agreement, claimant was required
to use and deploy its own resources for salvage operation. The claimant was also
authorized to clean, restore and catalogue the items of vessels and thereafter, the same
shall be auctioned in Europe. If the complainant did not find the wreck, then the
28 International Center for Settlement of Investment Disputes. (2016, August 09). Retrieved from International Center for Settlement of Investment Disputes website: https://icsid.worldbank.org/ 29 ICSID Case No.ARB/05/10 30 ICSID Case No.ARB/99/3 31 ICSID Case No.ARB/94/1
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Malaysian govt. would not be liable to pay costs etc. to the complainant. Meanwhile, the
complainant salvaged the cargo out of which Malaysian govt. paid the complainant 40%
of the proceeds instead of 70% as agreed between the parties and further Malaysian govt.
withheld salvaged items of Chinese origins of US$ 400,000 without payment of share to
the complainant. The complainant against such measures of Malaysian govt. resorted to
arbitration in terms of agreement clauses in 1995. The sole arbitrator dismissed the claims
of the claimant, thereafter, the complainant challenged the award before “Kuala Lumpur
Regional Center for Arbitration” and in “Malaysian High Court”, but did not succeed.
In 2004, the complainant filed a case before ICSID against Malaysian govt.
alleging violation of Articles 2 (Protection of Investment), Article 4 (Expropriation),
Article 5 (Repatriation of Investment) and Article 7 of UK-Malaysian BIT. The
arbitration proceeding was initiated and conducted under ICSID Convention and rules.
The Malaysian govt. took the objection regarding jurisdiction of ICSID. It also contended
that agreement with the complainant was not an “investment” related in terms of Article
25(1) of BIT nor such exercise of complainant contributed to economic development of
Malaysia. After hearing the arguments, the single arbitrator concluded that ICSID did not
have jurisdiction in the matter and contribution of complainant did not satisfy the
requirement of “investment” for Article 25(1) of the Convention and Article 19(9) of
BIT.
Being aggrieved, the complainant filed annulment of award proceeding in
September, 2007, for which adhoc Committee was constituted comprising of three
arbitrators. The ad hoc Committee annulled the ward and directed the payment of full
costs and expenses of ICSID annulment procedure. In support of decision, the Committee
gave three findings: -
i) That investment defined in ICSID Convention was not broadly been defined by
the Tribunal rather the Tribunal narrowly applied the definition of investment,
thus award is not sustainable.
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ii) Due to above defects, the tribunal divulged itself into jurisdiction of ICSID and
heavily relied on economic development of the host state, which also renders
the award illegal.
iii) The Tribunal did not consider undefined scope of the term investment in ICSID.
The draftsman purposefully left the terminology open to evolve it according to
given facts and circumstances and especially definition of investment as given
in subject BIT.
The second case was filed by Phillipe Gruslin against Malaysia in respect of
portfolio investment in securities invested in Kuala Lumpur Stock Exchange. The claim
basically relates to alleged losses that was caused to investment of claimant as Malaysia
allegedly violated the terms of Intergovernmental Agreement with Belgo-Luxembourg
Economic Union. The complainant specially alleged exchange controls slapped by the
Malaysian govt. as a breach of obligations under the said agreement. The
Intergovernmental Agreement between Malaysian and the Belgo-Luxembourg Economic
union was invoked in the case. In 1999, the Complainant registered a case with ICSID
and acceding the request, the President of ICSID constituted the Tribunal with a sole
arbitrator. The case was objected by the Malaysian govt. on the ground that investment of
claimant is not “approved projects” and the same also does not fall under the category of
investment in the territory of Malaysia under IGA. On the objection, the tribunal
concluded as under:-
mere investments in shares in the stock market, which can be traded by anyone, and are not connected to the development of an approved project, are not protected
The tribunal repelled the contention of the claimant that investment as defined
under Article 25(1) of ICSID convention also include Stock market investment by
holding that investment in the present case is to be defined by the terms of IGA itself and
rejected the claim. Thereafter, the claimant submitted a request for annulment of award,
which was discontinued for no-payment of advances in terms of Administrative and
Financial Regulation 14(3)(d).
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9. Malaysia vis-à-vis International investment Law
Malaysia has long way travelled to align itself with international investment
regime. Since, 1980s, the Malaysian has an open policy in investment and trade. Due to
which foreign investment has intensified into Malaysia and contributed into development
of its economy significantly. The FDI regime in Malaysia is strictly controlled as all the
foreign manufacturing activity must be licensed irrespective of nature of business32,
given the fact that Malaysia does not have FDI laws that could allow the foreigners to
participate in local business. Due to this, Malaysia took the chance by openly formulating
the policies as per their economic need. Like, foreign equity is regulated by “Foreign
Equity Guidelines” that can be altered by govt. as subordinate legislation.
The rise of FDI in Malaysia was also due to its good infrastructure, investment
policy consistency, open trade regime and political stability. Malaysia has also taken the
significant steps to reduce other measures of nationalization or expropriation without
payment, double taxation, joint venture requirements, domestic employment restrictions
and restriction on remittance of profits for which Malaysian relied upon BIT in achieving
above goals in the absence of foreign investment laws. The area of protecting foreign
investment also remained the top most priority in Malaysia. The Malaysia is following
the principle of “No expropriation without compensation”, which is also guaranteed
under Article 13 of the Federal Constitution. For protecting foreign investment, Malaysia
has also had the advantages of bilateral investment regimes or IGAs for protection
against expropriation, where expropriation has detailedly been defined. The following
areas are covered in Malaysian BIT, which were successfully used by Malaysia:-
a) Protection against appropriation of property and investment assets through
expropriation/nationalization.
b) Payment of quick and sufficient compensation in the event of expropriation.
c) Free movement of profits, capital and other fees.
d) Dispute resolution between investors and Malaysian Govt. under ICSID
convention.
32 Investment Regime: Malaysia. (2016 August 09). Retrieved from www.iisd.org/pdf/2004/investment_coutnry_report_malaysia.pdf
230
CHAPTER 5
CONCLUSION AND RECOMMENDATIONS
This study is carried out to review international law for investment at presently
enforced in Pakistan, China and Malaysia. It traces its development and factors contributing
to present shape of investment law. Under this study, various sources comprising as part of
international investment law are examined, such as international law, Bilateral Investment
Treaties and regional trade agreements. The influence of national laws over international
investment laws are also examined. The linkage between these two laws are crucial for
attracting foreign investment in any country, therefore, most countries promulgates more
investment friendly laws that are in consonance with international legal regime for
investment. They reshuffle their investment policy according to their need and to lure
foreign investment. The study critically examines, expropriation, National Treatment, MFN,
legal protection and security and investor-state relationship disputes resolution mechanism
using different arbitral forums are considered. “Foreign Direct Investment (FDI)” is an
interesting subject involving investment made by international companies into third
countries intended to gain profit on these investment and thereby contribute towards
prosperity, unemployment and alleviation of poverty. It is also responsible for creation of
new jobs in host countries. It is also termed as the component of country’s national accounts.
Many legal experts defined “FDI” as a procedure whereby nationals of one country (origin
country) acquires the assets of another state for having production and delivery of finished
good of the firm, which according to international investment theory, is strong and valuable
source for host countries.
Foreign Direct Investment is key element in evolving international economic
integration. “FDI” provides for direct stable and long term linkages between two economies.
It also advances the competitiveness of both home and host countries. It is also essential to
the recipient state in promoting its product wider and more open globally. “FDI” in addition
to its positive development and long lasting effect on economics is also important source of
capital for both host and home countries. Foreign investment can take the form of official
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and non-official flows. The phenomena of the digital era especially for developing countries
are there to rise more expectation amongst these countries. These countries have to be
closely linked with the developed world through digital revolution as it has shrunk the role
of the govt. and private person. Investment has various forms, which can be divided into
domestic investment and international investment and then “Foreign Direct Investment” &
“Foreign Indirect Investment”. FDI is mainly concerned with excess shares in the
enterprises by foreign investor than local investors. In another words, one investor with his
investment intends to invest in the company of corporation set up in another country and
then exercise assertive control over them is called “Foreign Direct Investment Company”. It
is important to highlight that affective control by foreign investor over company’s internal
management and into decision making power is also considered as investment. All above
events in development of FDI are attributable to many elements such as establishment of
WTO and advancement of information Technology are key ones. Furthermore, opening up
for more national markets, knowledge economy in domestic production and progressive
liberalization of foreign investment regulations and the steady and gradually development of
international law on foreign investment are also important reasons for substantial increases
and changes in field. Due to globalization, it is now very difficult to identify as to whether a
country is an investment home country or host country. National laws of countries on
investment also played a pivotal role. This includes national enactments policies, regulations
and can be classified as either restrictive or encouraging so that they may be able to alter the
means of investment as per their design, while making reinvestment or expand its business
would balance the advantages and disadvantages and compare the prospective profits to be
reaped by its changing strategy.
BIT is defined to be “agreement between two countries for reciprocal
encouragement, promotion and protection of investment in each other’s territories by
companies based in either country”. The basic structure of BIT remained the same over the
years. A BIT starts with preamble that gives details and information about agreement and
provisions on its scope of application. The relevant terminology like “investment” and
“investor” are also used. Thereafter, the admission of foreign investment and its
establishment is provided in BIT. Protection clauses such as “Standards of Treatment” is
also taken care of in BIT. These includes “Minimum Standards of treatment”, “fair and
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equitable treatment”, “full protection and security”, “national treatment and most favored
nation treatment”. BITs also include exchange of investment proceeds to and fro home
country and host country. The expropriation option is also given in BITs as to in which
circumstances, the expropriation would take place and how the parties would go by it.
Likewise, quantum of compensation is also defined in BIT. The provisions related to war
and civil unrest and their protection are also dilated into modern practice of BITs. The
provisions like “investor-state dispute settlement” mentions that the resolution investment
disputes be brought to the International Arbitral Tribunals (e.g. ICSID, UNCITRAL and
ICC). Sometimes, BITs also included a clause on “State-State Dispute Settlement”. BITs
usually have time limitation of the treaty as to how the agreement is terminated or extended
further specifying to what extent investment conducted prior to conclusion and satisfaction
of the treaty. The substantive part of any bilateral investment treaties are more or less the
same only worlds are changed and it is always recommended that reference be made to
words as they are used in any investment treaty. Another important provision in BIT is “Fair
and Equitable Treatment”, which means that the states must have a consistent legal
framework and all the decisions must be made consistently and transparently, as per
legitimate requirement of the investors. Sometimes, in BIT, the investment of foreign
investor is given favorable treatment as is given to nationals of host states and this doctrine
is called “National Treatment Standard”. This provision of treaty is an important protection
to discourage discriminatory law against the investors i.e. Special Taxes or licensing
requirement, levied only on foreign investors. For example, in the case title as Marvin
Feldman V. Mexico, a US citizen, filed a case for non-payment of tax refunds to CEMSA
against Mexico as the Mexican authorities were denying tax refunds even to Mexican
exporters on the basis of judgments of their Supreme Court). The Tribunal held the non-
payment of refund as illegal and is in violation of national treatment standard under
NAFTA. Repatriation of investment proceeds to origin country is also important issue,
which are normally allowed by host states as a treaty obligation. This is standard Model
clause whereby permission to transfer funds related to investment is allowed without any
restriction in a hassle free manner from host country. Thereafter, “Most Favored National
Standard Treatment” clause is also found in BIT, where the host country treats the foreign
investment equals to the investments from any other third state. For example, if the Chinese
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investors are given an exemption from a tax, then British investors would also be equally
entitled to request for the same treatment under China-British BIT. In “Bayindir Insaat
Turizm Ticaret Ve SanayiAs v. Islamic Republic of Pakistan”, a Turkish investor
successfully relied upon this clause in Pakistan-Turkey BIT to benefit from the treatment of
“fair and equitable treatment” provision in the Pakistan-Switzerland BIT. The MFN can be
used by the investor to get a procedure benefit. Like in Australia and China, there is no
direct right to arbitration except the issue of determining compensation amount payable by
expropriation. China’s latest BIT, however, contains clauses giving right to foreign investor
for arbitration. For example, the treaties of China with Germany and the Netherlands allows
the investor to seek recourse to arbitration in case of investment arbitration. This can be at
best argument for Australian investor in support of MFN in his favor.
China is considered to be a largest recipient of foreign investment so far as
developing countries are concerned. Foreign investment is, in fact, largely contributing
towards promotion of Chinese trade, investment and other revenues for its economy. As
against traditionally, many structural changes were brought about to further transform and
liberalize investment. These are reviving of equity joint ventures, tremendous growth in
service and relocation of FDI from Eastern Region to the Central and Western Regions.
Hardly, within a span of fourteen years (From 1999 to 2013) and after launching Go Abroad
Policy, the China earned second largest economy in terms of GDP after US with total
amount of US$ 9.240 trillion. Due to said policy of 1999, Chinese investments are booming
in the past three decades. By the end of 2012, it is estimated that 16,000 investors
established 22,000 companies in 179 countries all over the world. China during last three
decades worked really hard to provide its economy a level playing field for investment. Its
policies remained successful throughout as per international investors; confidence, the China
is still considered one of the favorite destination for foreign direct investment. During recent
global crisis, the China’s success was not affected in foreign investment as compared to FDI
contraction. After 2008, China has introduced a number of changes in foreign direct
investment regime. For example, the ceiling of provincial examination and approval
authority over foreign investment was raised in the category of “permitted catalogue”. State
council also approve application of approval of service industries as well. In order to
develop China’s central and Western (Commonly called hinterland regimes), which are less
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grown-up than Eastern Region, Chinese govt. has put some etc. efforts since 1990s and
successfully implemented many policies to promote both domestic and foreign investment.
For this, a catalogue of advantaged industries for Foreign Investment in the Central and
Western Regions was promulgated in the year 2009, whereby, provinces of Shanxi, Inner
Mongolia, Liaoning, Julin, Heilongjiang, Anhui, Jiangxi, Henan, Hubei, Hunan and Guangxi
were included. For every province, 20 projects were proposed. The customs laws were also
relaxed giving tariff exemptions on equipment imports for certain foreign investment
projects in the central and Western Regions.
Pakistan after independence has long way travelled in attracting foreign direct
investments into its territory. The investor friendly laws, rules and regulations and financial
incentives not only are encouraging investment at vast scale, but the same is also creating
more jobs and employment opportunity to people of Pakistan. The per capita of every
individual is likely to be increased by passage of time. Need of hour is that the Govt. of
Pakistan should win the foreign investment by giving priority and removing major hurdles,
like energy, law and order crises, so that much needed and valuable foreign exchange and
foreign investment may start flowing into technology starved country into economy of
Pakistan. The existing laws on the subject are obsolete, which need updation and
reexamination especially Bilateral Investment Treaties regime in the light of modern
international investment law and its best practices. China and Malaysia are one of few
examples that have seen some of largest FDI inflows despite having stringent restrictions on
capital flows. So, let signing of BITs would not solve the problems, but more pragmatic
approach should be adopted like developing educated work force and technology-oriented
advancement towards wooing the foreign investment.
Though, Pakistani regulatory investment environment is competitive and most
friendly in the world. Unlike India and other emerging economies, Pakistan has no
restrictions on foreign ownership, foreign exchange conversions profits’ repatriations and
expatriates’ hiring is permissible in Pakistan. Pakistan also has the lowest corporate taxes
and offers tax incentives for strategic investments. Under the present scheme of Pakistani
laws on foreign investment, foreign investors are allowed to hold 100% ownership in
industrial projects. Govt. cannot impose sanctions on setting up any industry relating to any
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field of business, location and size except some specified fields. As per new investment
policy of Pakistan, no new activity relating to manufacturing of alcoholic drinks and
beverages are allowed to be carried out in any part of Pakistan. The investors are ought not
to seek any kind of approval for setting up a foreign project except for the negative areas.
The foreign investment are allowed on repatriable basis in agriculture, infrastructure, service
and social sectors. Only requirement is registration of a company with the SECP under the
Companies Ordinance, 1984 and the information to State Bank of Pakistan.
Investment in deregulated services are also allowed in Pakistan subject to prior
permission/NOC or license from concerned agencies and respective sectorial policies. Some
of the deregulated services in telecommunications are Email/Internet/Electronic Information
Services (EIS) and Data Communication Network Services, etc. The above deregulated
services are permissible in collaboration with the national company for telecommunication
i.e. Pakistan Telecommunication Ltd. Investment policy of 1997 is catalyst in Pakistani
investment and is considered to be primary source for a present liberal investment regime in
terms of investors facilitation and sectors of investment. The investment regime of 1997 was
further broadened through Investment Policy, 2013 announced by Federal govt. The said
policy permits investment in all sectors of the economy unless specifically and categorically
prohibited for want of public safety and national security. The Investment Policy, 2013 does
not specify the minimum requirement of amount of foreign equity investment in any sector.
Foreign investors are granted the same status as that of local and domestic investors, and
they are entitled to all other facilities available to local and domestic investors on equal
basis. There is also no restriction on the upper limit on the share of foreign equity except
few sectors, like airlines, agriculture, banking and media.
Pakistan is remarkably benefiting from its BITs programs to improve their economy,
but on the other hand, ADR mechanism exposes it to international arbitration tribunal and in
such case, local remedies are not an option, which in result burden the economy with the
cost of contesting the investors claim at the arbitration tribunal. The case study of Argentina
is 2001-2002 is an eye opener, where sovereignty of Argentina was bitterly exposed and led
to domestic economic crises. At current, Pakistan has signed 46 BITs, given the current
investment climate, Pakistan has no other option but to rely on BITs in only alternative to
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secure foreign investment. In Pakistan, the policymakers are keen to attract more direct
foreign capital and 15 more BITs are under process with no evidence that previous at or
about 50 produce any desired results. Pakistan in Investment policy 2013 has adopted new
policy trends and even has introduced new draft template; which centers on arbitration
clauses. According to these model template, the specific period has been set up for
settlement of disputes prior to going to international arbitration.
The fragility of executed BITs by Pakistan so far can be observed that in the year
1996, Pakistani Govt. terminated the contract of SGS Societe General de Surveillance (SGS)
on the suspicion that it had been procured through bribe, which was denied and objected
over by SGS, whereafter, a series of legal proceedings in Switzerland and Pakistan began,
but all failed. To the surprise, after five years, ICSID issued a letter calling upon the
Pakistani Govt. to pay more than US$ 110 million in compensation on the basis of BIT
enforced between two countries despite the fact that the dispute in the courts of both
countries failed. After the letter from ICSID, govt. Officials came to know that how serious,
the matter was as the commercial rights were involved for a wide range of regulatory
conduct on the basis of vague treaty language, which allowed the SGS to settle disputes with
Pakistan Govt. outside Pakistan’s own legal system i.e. approaching ICSID on arbitration
forum.
It is estimated that Pakistan has faced claims worth US one billion dollars just
because of vague international investment treaties that are contrary to the interest of the
country. All of the BITs ratified and implemented are binding on Pakistan incase the foreign
investors were to file a claim against Pakistan. If the award is given against the govt. and is
not implemented, the treaties allow the affected party to seize foreign assets of the country.
Most of these BITs are drafted in 1990, but Pakistan developed its own draft treaty in 2006.
According to the Secretary of Board of Investment a careful balance has to be taken while
drafting policies and international agreements so that guarantees in these agreement in no
way infringe on the interest of the country’s development. Pakistan lacked the capacity to
pace up with the ever-changing international legal environment and issues pertaining to
security, energy, shortage and regulatory impediments, those are in practice the causes of
filing of claim by the investors.
237
Pakistan’s BITs have been signed by different govt. officials and representatives and
department officials over the years, therefore, there is a lack of control over the procedure ad
process of these BITs. BITs in past were signed rather as “ceremonial gestures” coupled
with unsophisticated negotiations, without knowledge of their implication and when you are
hit by the first investor states arbitration you realize what these mean. According to statistics
of Board of Investment, US remains on the top of five investors in Pakistan. Negotiations of
BIT of Pakistan with US commenced in 2004. Nevertheless, the US investors felt concerns
about inadequate protection to American investors in Pakistan especially in the wake of
decisions of Supreme Court of Pakistan in Siemens Westinghouse dispute, in which
Supreme Court did not enforce the arbitration award in favor of the US investor. The US-
Pakistan BIT negotiations were conducted in the wake of the four known BIT claims, which
is facing suspension due to review by US of its model BIT.
Apart from BITs, the laws related to arbitration and arbitral awards are still facing
problems in Pakistan due to restriction of section 4 of the new Act of 2011 that restrict
awards prior to 14 July 2005. It is also argued that the Act, 2011 contains error that could
seriously stop parties hoping to rely on international arbitration agreements in Pakistan. In
this enactment, only High Courts of Pakistan are made the ultimate courts of law for
enforcement of awards, whereas under Civil Procedural Code, commercial disputes are
referable to the local courts for trial. These lower courts have no jurisdiction to recognize
arbitration agreements in accordance with the New York Convention in respect to their
jurisdiction.
To attract foreign capital, technology and management expertise, China passed its
first foreign investment legislation in the year 1979 i.e. “Sino Foreign Equity Joint Venture”.
On economic front, the govt. also established four economic zones (SEZs)- Shezhen,
Zhunhai, Shantoou, and Xiamenm, where certain investment incentives were offered to
foreign investors. Subsequently, the govt. designated 14 open Coastal cities, such as Dalian,
Fuzhou, Guangzhou, Shanghai, Ningbo, Qingdao, and Tiajin to increase the flows of foreign
capital and Technology. At present, there is 1982 Constitution, which is in field and it
preambles says that the China would adopt a Socialist Economy. To date, China has
executed almost 145 Bilateral Investment Treaties with different countries and 20
238
Intentional Investment Agreements (IIAs). It is argued that China should change its position
from old style of BITs to new moderate one especially lessons learned from investor State
Dispute Settlement. The present policy regime of China started in 1978 after promulgation
of the “Sino Foreign Equity Joint Ventures” Law. China signed first BIT with Sweden in
1982 and thereafter in the middle of 80’s, China executed a dozen of BIT with Western
European States. In the end of 1980 and start of 1990, China entered into BITs, with states
in Eastern Europe and Asia. BITs negotiated by China are divided into three parts i.e. i) first
part comprises of the period of 1980s, ii) second part comprises of the period of 1990s and
iii) third part is that portion of BITs, that were signed in late 1990s.
In order to get more domestic and foreign investment, Pakistani govt. ought to have
certain remedial actions like increasing of interest rate, which would force the domestic
investors to bring out their investment. The other issues plaguing the investment
environment in Pakistan is energy crisis, terrorism, bad economic conditions and weak
implementation of law and order situations, which has to be addressed at earliest. The govt.
would also have to strengthen stock markets. The stronger the investment laws, the more it
would fetch the foreign investment as per studies suggested by Lloyd’s of London 2007, as
the foreign investors scare away due to uncertainty of future hovering their investment and
see weak enforcement of laws as a threat to their equity. The good governance would have
to be ensured by Pakistan to woo foreign investment. Currently, Pakistan is facing financial
turmoil due to terrorist attacks, which has to be tackled on war footing basis, yet Pakistan
investment laws are in line with international investment regime, but its enforcement is
weaker, therefore, a task force has to be constituted to streamline these laws.
Law and order also plays an important role for economic growth of any country.
Pakistan has great potential for investment and all four provinces have rich natural resource.
Due to this law and order situation, we cannot fully reap from these natural resources. All
the managerial and govt. department are in a dilapidated condition, which have to be
upgraded. The budget deficit has to be lowered on top priority. Pakistan courts are patriotic
when dealing with foreign investors, which is confidence-shattering for foreign investors.
The recent judgment of Hon’ble Supreme Court of Pakistan in Reko diq Case and other
decision of Pakistan Courts i.e. HUBCO case and ECKHARDT’s case were seen an eye
239
opener for foreign investors, there is lack of implementation of the economic laws and the
policies.
Pakistan is geographically ideal country for foreign investment, it has thousands
kilometer of coastline with Arabian Sea, which opens its gate for trade with central Asia and
other market of worlds. With its border with Iran, China, India and Afghanistan enhances its
value. There is a huge market of buyers and sellers in Pakistan. Better policies for
information technologies, communication technologies, logistics infrastructure
improvement, and low cost of labor are some of key issues need address to attract foreign
investment, which would increase high GDP and the investors like those economies with a
such economic values.
240
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