The benefits of the UK-China bilateral investment treaty

Bilateral investment treaties (BITs) are of particular utility when investing into China, given the level of government regulation of the economy, and the authorizations required for foreign investments in China. Around the world, over 180 countries have entered into over 2,400 BITs, which are specifically designed to protect foreign investors and their investments. BITs therefore provide a powerful shield and sword to foreign investors whose investments are negatively affected by the activities (or inactivity) of states and state entities (including central, regional and municipal governments; government departments and ministries; local councils; industry regulators; courts; and government authorities and institutions).

A BIT is a treaty entered into between two states providing for the promotion and protection of the investments of the nationals of each state in the territory of the other. They are usually entered into between capital-exporting nations and capital-importing nations as part of trade negotiations. Among other things, the two contracting states typically each promise to treat private investors from the other signatory state “fairly and reasonably”, not to “discriminate” against them and not to nationalize or expropriate their investments without reasonable compensation.

The advent of international arbitration to resolve disputes arising under BITs means that foreign investors can think beyond the dispute resolution options previously available to them (contract; tort; local or foreign courts; or arbitration under the investment contract) to international legal rights enshrined in a treaty that provides for an international law arbitration.

The usual preconditions to relying on a BIT are that the “investor” makes an “investment” in the host state. The definition of “investment” is largely the same in each BIT, however, the definition of “investor” varies between BITs. This variation can have a significant impact on the ability of foreign investors to gain protection.

Definition of investor

“Investors” are usually defined in BITs as natural persons who are nationals of one party to the BIT or companies incorporated in one party to the BIT. BITs with China usually require that the “seat” of the investing company be in the other party to the BIT. The UK is the only major trading nation (other than New Zealand) not to have this requirement in its BIT with China. As a result, if a company wishes to take advantage of a BIT with China but its state does not have a BIT with China, then that company can invest via the UK.

This provides the UK with a great advantage as the economic power of China continues to grow, and investment into and out of China grows with it. Companies legally based in the UK may invest in China in the confidence that their investment will be protected by the provisions of the UK-China BIT. Perhaps more importantly for the UK economy, the UK is one of the few countries in the world where foreign investors whose seat is elsewhere in the world may set up a special purpose vehicle (SPV) company through which to route their investments to China.

Definition of investment

The UK-China BIT includes a broad definition of “investment”. It provides that almost every kind of asset may constitute an “investment” and gives examples such as property rights, shares, claims to money or performance under a contract, and
intangible rights.

These definitions of “investment” will usually allow a foreign investor to claim compensation for any diminution in the value of its investment in a company incorporated in the host state where the cause of that decrease in value was a breach of the standards set out in the BIT. This effectively side-steps the problems that shareholders often have in bringing claims where the wrong was done to the company they invested in, rather than to the investor itself.

The UK-China BIT also includes other key provisions that are common to many BITs. It includes an assurance that a host state will not expropriate foreign investments without paying the investor prompt, adequate and effective compensation for the devaluation or loss of the investment.

In addition, the UK-China BIT includes rights of a foreign investor to be afforded fair and equitable treatment. This standard allows an arbitral tribunal to assess the “fairness” of a host state’s actions. In general terms this standard has been construed as requiring host states to maintain stable and predictable investment environments consistent with an investor’s legitimate expectations and the host state’s previous commitments.

In common with most BITs, the UK-China BIT also guarantees treatment to investors that is no less favourable than that which the host state affords to investors of another country or to its own nationals (such clauses are commonly referred to as “most favoured nation” or MFN clauses).

The UK-China BIT also contains a consent to international arbitration under widely accepted international arbitration rules in the event of a dispute. The standards of conduct required of the host state, detailed above, will be measured by the standards of international law, not by the national law of the host state. In this way, the difficulty and high cost to a company of having to seek legal redress against a state (or state entities) before the local courts in that state, or under that state’s own laws, can be avoided.

Increasingly, the mere threat of BIT arbitration by an aggrieved investor has been enough to bring representatives of a dilatory or recalcitrant host state to the negotiating table. However, BIT arbitration may also be commenced concurrently with an action under any investment contract, thereby allowing the investor to maximize pressure and leverage on both the contractual counterparty and the host state.

For companies based in the UK and considering investing into China, the ability to challenge the state under the provisions of the UK-China BIT and, thereby, potentially to force both China and a contractual counterparty into negotiations, provides a valuable safety net.

Stuart Dutson is a partner, and Amin Batada is a solicitor, at Eversheds