• Think Twice before Seeking Remedies: The "Fork in the Road" Clause of International Investment Arbitration under BITs/MITs with China
  • December 2, 2014
  • Law Firm: Lee Tsai Partners Attorneys-at-Law - Taipei Office
  • In June 2014, the International Center for Settlement of Investment Disputes (ICSID) rendered an unpublished decision (reported in Global Arbitration Review and Investment Arbitration Reporter), holding that since the H&H Enterprises Investments, the US investor referring its disputes to arbitration, violated the "fork in the road" clause in the bilateral investment treaty executed between Egypt and the US, the US investor's investment arbitration application in which Egypt's government was the respondent was rejected on the ground that the arbitration tribunal had no jurisdiction.
     
    The so-called "fork in the road" clause means that in the event of any P to G dispute between an investor and the invested country, the issue of conflicts between international investment arbitration and domestic remedies within the invested country is mostly stipulated in the bilateral/multilateral investment treaty (hereinafter, the "BIT/MIT") between the invested country and the country of the investor.

    Mainland China has actively signed BITs/MITs with various countries in recent years, and the fork-in-road clause on international investment arbitration is not uncommon among the treaties. However, different BITs have different degrees of strictness in such restrictions. If the difference in the strictness of the fork-in-the-road clause is applied to investment structure arrangements, P to G investment dispute remedies in mainland China will be more diverse and it will not be necessary to be subject to the constraint that if remedies are sought from courts or administrative agencies in different places, the opportunity for international arbitration will be lost. This notice seeks to illustrate these fork-in-the-road clauses with different degrees of strictness:

    I. If an investor has filed a complaint with a domestic court, investment arbitration cannot be sought. Early BITs with China and the China-Belgium BIT

    The BITs executed with mainland China in early times strictly stipulate the fork-in-the-road clause in general as "once an investor submits any dispute to a competent court in a relevant signatory country or...[manners of international investment arbitration agreed by the parties], the choice of any of the above-mentioned two options shall be final." However, such strict fork-in-the-road clause still appears in recent BITs executed with mainland China. Article 8, Paragraph 2 of the BIT executed among China, Belgium and Luxembourg is an example:

    2. If any dispute is not resolved through negotiation within six months after the disputing party notifies the other party, all signatories agree that the dispute will be submitted at the investor's option as follows:

    (1) A competent court in the country of a disputing party.
    (2) The ICSID established in accordance with the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States signed in Washington on March 18, 1965.

    Once an investor submits disputes to a competent court in the country of a relevant signatory or the ICSID, the choice of either of the above options shall be final.

    In the event of P to G investment disputes facing investors in the mainland China area, before seeking remedies from any court in China, it is necessary to first consider the BIT which may form the basis of future international investment arbitration. If the BIT which is relied on adopts such fork-in-the-road clause (in addition to the BIT among China, Belgium and Luxembourg, the BIT between China and Spain is also an example), an investor should first consider the chances of obtaining remedies from a lawsuit filed in a court in mainland China before deciding on the remedies to be sought. The reason is that if it is decided to choose either "filing a complaint with a national court" or "referring to international arbitration," the other avenue of remedy will be no longer available.
     
    II. Even if remedies have been sought from a court, the lawsuit may be withdrawn before the investment arbitration: Recent BITs with China and the BIT between China and the Netherlands

    In comparison with the BIT between China and Belgium, the restriction on fork-the-road clause in recent BITs executed with mainland China has been relaxed, and an investor is allowed to seek remedies from a national court in mainland China first, withdraw the complaint before a decision is rendered by the court and then refer to international investment arbitration. Such type of treaty (including the BITs executed by the Netherlands, Germany, Switzerland, and ASEAN with China) grants higher remedy flexibility to investors and allow investors to test temperature at a national court first before deciding if the disputes will be subject to a final decision of a national court. The following is Article 10, Paragraph 2 of the China-Netherlands BIT, which is cited as an example:

    2. An investor may decide to submit a dispute to a competent domestic court. In case a legal dispute concerning an investment in the territory of the People's Republic of China has been submitted to a competent domestic court, this dispute may be submitted to international dispute settlement, on the condition that the investor concerned has withdrawn its case from the domestic court. If a dispute concerns an investment in the territory of the Kingdom of the Netherlands an investor may choose to submit a dispute to international dispute settlement at any time.
     
    III. International arbitration can be sought only when remedies from national courts is in failure: MITs between China, Japan or Korea

    The third type of fork-in-the-road clause does not limit investors to either international or national remedies. Conversely, such treaty only stipulates the sequence of remedies for investment disputes and requires that international arbitration may be sought only when the domestic remedies agreed between the contracting country (e.g., the MITs between China, Japan and Korea require that the "administrative reconsideration procedure" shall be followed first) are not fruitful. To wit, if an investor does not seek remedies from a national court and elect, instead, to refer to international arbitration directly, the arbitration tribunal will reject the investor's application for a lack of jurisdiction. The following is Article 15, Paragraphs 2 and 3 of the MIT between China, Japan and Korea, which are provided as an example:

    2. Any investment dispute shall, as far as possible, be settled amicably through consultation between the investor who is a party to the investment dispute (hereinafter referred to in this Article as “disputing investor”) and the Contracting Party that is a party to the investment dispute (hereinafter referred to in this Article as “disputing Contracting Party”). A written request for consultation shall be submitted to the disputing Contracting Party by the disputing investor before the submission of the investment dispute to the arbitration set out in paragraph.

    3. The investment dispute shall at the request of the disputing investor be submitted to either: (a) a competent court of the disputing Contracting Party; (b) arbitration in accordance with the ICSID Convention, if the ICSID Convention is available; (c) arbitration under the ICSID Additional Facility Rules, if the ICSID Additional Facility Rules are available; (d) arbitration under the UNCITRAL Arbitration Rules; or (e) if agreed with the disputing Contracting Party, any arbitration in accordance with other arbitration rules, provided that, for the purposes of subparagraphs (b) through (e):

    (i) the investment dispute cannot be settled through the consultation referred to in paragraph 2 within four months from the date of the submission of the written request for consultation to the disputing Contracting Party; and
    (ii) the requirement concerning the domestic administrative review procedure set out in paragraph 7, where applicable, is met.

    7. When the disputing investor submits a written request for consultation to the disputing Contracting Party under paragraph 2, the disputing Contracting Party may require, without delay, the investor concerned to go through the domestic administrative review procedure specified by the laws and regulations of that Contracting Party before the submission to the arbitration set out in paragraph 3. The domestic administrative review procedure shall not exceed four months from the date on which an application for the review is filed. If the procedure is not completed by the end of the four months, it shall be deemed to be completed and the disputing investor may submit the investment dispute to the arbitration set out in paragraph 3. The investor may file an application for the review unless the four months consultation period as provided in paragraph 3 has elapsed.

    For Taiwanese investors, the protection of investment mainland China has been greatly improved due to the execution of a cross-strait investment agreement with very limited incidents of disputes. The dispute resolution methods focusing primarily on mediation under the cross-strait investment protection agreement should be effective in most circumstances. However, if an investor is still considering the use of the investment arbitration procedure to resolve investment disputes with a government, there is still room for the choice of investment body.

    However, the nationality of the corporate entity by which an enterprise from a certain industry should invest in mainland China varies. In addition to the consideration of investment protection and the review of international investment arbitration clauses under different BITs/MITs (which include the above-mentioned fork-in-the-road clause), it is still necessary to generally observe all kinds of international treaties on industries, tax collection, investment and other commercial factors between such area and Mainland China to make the decision.