16 March 2015

A Chinese perspective: Africa – China Bilateral Investment Treaties

At the dawn of the 21st century, the Forum on China-Africa Cooperation (FOCAC) was established in Beijing with the aim of promoting common development.  The rapid growth of investment flow between the two sides since then has amazed the world.  Vast opportunities in African countries have attracted thousands of Chinese investors, from infrastructure constructors to shoe makers.  

According to China’s Ministry of Commerce (MOFCOM) statistics, during January-November 2014, direct investments (excluding financial assets) flow from China to Africa was 3.5 billion USD, representing a 19% increase compared with the same period of 2013 and more than 6 times of the amount in 2006[1].   Major destinations for Chinese investments in Africa include South Africa, Zambia, Nigeria, Algeria and Angola.  

Despite the fact that investment activities have been booming over the past decade, foreign investments continue to remain sensitive to risks and uncertainties related to the legal environment, regulatory framework and political climate of the host state.  To ensure that such potential risks and uncertainties do not become an undue impediment to international capital flow, capital-importing states (host states) and capital-exporting states (home states) have signed bilateral investment treaties (BITs) to promote and protect cross border investments from expropriation or other unjustifiable conducts attributable to state parties.  

This article introduces the BITs signed between China and African countries and their role as an important and effective investment protection tool readily available to Chinese investors in Africa and vice versa.

An Overview of Africa – China Bilateral Investment Treaties (BITs)

In the past decades, an increasing number of BITs have been signed between China and African countries along with the tremendous investment flow noted above.  In the period from 1989 to date, 33 African countries have signed BITs with China, among which 16 BITs have entered into effect (see the table below for a summary of these BITs).   Although these BITs were signed by China over an extended period of time and with different African treaty partners, an overview shows some common features as follows:

  • All these BITs follow the same basic structure, providing the basic treatment and protection for investors and mechanisms for resolving investment disputes;
  • Recent BITs are becoming more sophisticated and comprehensive in terms of protection level by expanding the scope of claims that the investor can submit to international arbitration;
  • None of these BITs contain any market access commitments, and they only protect investments with respect to the “post-entry” phase.  In other words, they do not commit contracting states to open particular sectors to foreign investments; they only protect investments after they have been duly admitted into the territory of the host country.

A further analysis of these features is set out herein.

BITs between African countries and China (in chronological sequence of the date of signature) 

Country  Signature Date  Country  Signature Date  Country  Signature Date 
 Ghana   12/10/1989  South Africa  30/12/1997  Benin*  18/02/2004
 Egypt  21/04/1994  Cape Verde  21/04/1998  Uganda*  27/05/2004
 Morocco  27/03/1995  Ethiopia  11/05/1998  Tunisia  21/06/2004
 Mauritius  04/05/1996  Congo Rep.*  20/03/2000  Equatorial Guinea*  20/10/2005
 Zimbabwe  21/05/1996  Botswana*  12/06/2000  Namibia*  17/11/2005
 Zambia*  21/06/1996  Sierra Leone*  16/05/2001  Madagascar  21/11/2005
 Algeria  17/10/1996  Mozambique  10/07/2001  Seychelles*  10/02/2007
 Gabon  09/05/1997  Kenya*  16/07/2001  Mali  12/02/2009
 Cameroon*  10/05/1997  Nigeria  27/08/2001  Chad*  26/04/2010
 Sudan  30/05/1997  Cote d'Ivoire*  30/09/2002  Libya  04/08/2010
 Congo D.R.*  18/12/1997  Djibouti*  18/08/2003  Tanzania  24/03/2013

*BITS signed but not yet entered into force

Analysis of Typical Provisions in Africa – China BITs 

Scope of a contracting state

A BIT is usually signed by two sovereign countries, which, from an investor's perspective, include the home country and the host country.  While an investor is not a party to the BIT, the BIT is concluded for the protection of investors from both countries.  An investor is entitled to claim that the host state violates the BIT which thereby gives rise to state responsibility.  All current Africa – China BITs do not contain any specific definition for the term “contracting state”; neither do they specify the types of persons or entities in the host state that are subject to the obligations of the BITs.  In the absence of such a definition or provision, the rules of customary international law on state responsibility come into play.[2]   Under such rules, a state is held accountable for the act or omission of its formal state organs at different levels of governments (e.g. ministry of foreign investment, ministry of finance, provincial government).  

In addition, the acts of any person or entity (e.g. state-owned enterprise) which is empowered by the law to exercise elements of the governmental authority are also attributed to the state when they act in such capacity.  In some cases, when a government instructs or directs a totally unrelated entity to carry out a conduct, the conduct of that entity may also be attributable to the state. 

Definition of investment

In most BITs signed between African countries and China, the concept of “investment” is broadly defined to cover assets invested by an investor in a treaty party, such as properties, equity, claims, intellectual property rights (IPRs) and concessions.  However, as required by many BITs, “investment” must be made in accordance with the laws and regulations of the host state.[3]   Therefore, compliance with the domestic law of the host country is a vital premise for investors to have their investments protected under the BITs.

Fair and equitable treatment

Under most of the BITs, including those signed between African countries and China, affording fair and equitable treatment (FET) to foreign investors and their investments is the key commitment made by contracting states.  Under customary international law, FET is understood to include at least the requirement not to deny justice in civil, administrative and criminal proceedings.  

Some more recent Africa – China BITs further elaborate on this standard.   For example, Article 3.2 of the Madagascar-China BIT illustrates that legal or factual impediments to fair and equitable treatment include restrictions on the investor’s production, operation or sale of products.  

Article 5.2 of the Tanzania-China BIT also specifies that FET means that investors of one contracting state shall not be denied fair judicial proceedings by the other contracting state or be treated with obvious discriminatory or arbitrary measures.

Most favored nation (MFN) treatment and national treatment

Most Africa – China BITs also require MFN treatment and national treatment, which means the contracting states shall grant investors of the other contracting state and their investments treatment no less favorable than those from the host state or third countries.  In prior arbitral cases, the MFN treatment has been proven to be an effective tool for foreign investors to leverage better treatment than that granted under the directly applicable BIT.

Protection from expropriation

Expropriation means taking of properties or rights by the host state, either by way of outright nationalization (direct expropriation) or gradual infringement (indirect expropriation).  In general, Africa – China BITs set strict limits on host state’s ability to expropriate, unless it is: 

(a) for purpose of public interest under domestic law; 
(b) on a non-discriminatory basis and; 
(c) with prompt compensation.  Most of these BITs further require that such compensation covers the market value of the expropriated investment plus interests.  Such stringent requirements safeguard investments against undue government seizure.

Ensuring transferability of investment and returns

Most BITs have specific articles to ensure transferability of investment returns, including profits, liquidated investments, payment made pursuant to contracts, etc.  More importantly, host states must allow such transfer to be made in convertible currency at a market exchange rate.  Noteworthy, most Africa – China BITs since 2004 include a "balance of payment" exception to the transfer obligations.  For example, Article 8.4 of the Tanzania-China BIT stipulates that “[i]n case of a serious balance of payments (BoP) difficulty or of a threat thereof, each Contracting Party may temporarily restrict transfers.”  Thus, Chinese investors into Africa should pay close attention to the BoP position of a host state. 

“Umbrella Clause”

An “umbrella clause” in a BIT usually requires the contracting states to observe any obligation it enters into with respect to the investor.  When the host state breaches any contractual obligation, it is also violating the BIT.  Effectively, an umbrella clause upgrades a contractual obligation into a treaty obligation.  Such “umbrella clauses” can be found in Article 10.2 of South Africa – China BIT, Nigeria-China BIT and Benin-China BIT, etc.  

For Chinese investors into Africa, such provisions provide them with additional protection and assurance in that host states undertake to honor investment contracts as their international obligations.  Setting aside any dispute resolution clause in an investment contract, a Chinese investor into Africa can also resort to the more powerful "investor-state dispute settlement" (discussed below) to enforce its rights. 

Investor – State Dispute Settlement: the optimal tool for resolving investment disputes

A prominent feature of BITs as a tool for investment protection is its self-contained dispute settlement mechanism, also known as the “Investor – State Dispute Settlement” (ISDS). As the term indicates, it is a dispute settlement mechanism through which foreign investors defend themselves against egregious governmental abuse of power under an international forum.  ISDS provides an independent and effective mechanism for resolving investment disputes.  

In comparison to resorting to local courts for remedy, the ISDS mechanism has the benefit of shielding investors from potential political influence by the host state government in court cases.  Given the varying levels of development in judicial systems in different countries, the possibility that a host state government may interfere in domestic adjudicatory proceedings cannot always be excluded.  Further, before a domestic court, the applicable law is usually the domestic law of the host state, which may be subject to changes unfavorable to investors.  

In contrast, under international arbitration, an investor may have a claim directly under the treaty provisions, providing stable and higher quality protection.  Thus, in most cases investors may have a better chance of success when an investment dispute is brought before an international tribunal. 

Types of disputes

While all BITs signed by China and African countries provide for ISDS mechanism, the types of disputes that may be submitted to arbitration vary from treaty to treaty.  Notably, according to the China – Ghana BIT signed in the late 1980s, only disputes concerning “the amount of compensation for expropriation” may be submitted to an arbitral tribunal.[4]   In contrast, BITs signed by China with South Africa and Nigeria in late 1990s/early 2000s provide for ISDS mechanism to “any dispute…in connection with an investment”.[5]   Therefore, when investing in Africa, Chinese investors should be mindful of the relevant BIT provisions to make sure a dispute is covered by the scope of ISDS. 

“Fork-in-the-road” provision

In order to secure its access to the ISDS mechanism, an investor should pay close attention to the so-called “fork-in-the-road” provision.  In all China – Africa BITs, there is the mandatory requirement on the investor to choose from either domestic proceeding or international arbitration.[6]   In other words, once the investor has submitted the dispute to the competent court of the host state, it is no longer eligible for bringing a treaty claim to an international arbitration tribunal.  Such a stipulation is vividly named as the “fork-in-the-road” provision, indicating that the investor has to choose one way or another at the cross-road for ways of remedy in the event that it has suffered loss from a host state’s action or inaction which may amount to a violation of a treaty obligation.

Guaranteed Enforcement

Another merit of the ISDS mechanism for investment protection is the mechanism guaranteeing enforcement of arbitral award.  Regardless of the forum of arbitration, the host state has an international obligation under the BITs to implement an award in favour of the investor once the award has been rendered.  Furthermore, in most cases, the award may be enforced in a country other than the host state.  More than 20 BITs signed by China with African countries specifically refer to the International Center for Settlement of Investment Disputes (ICSID) as the forum that may hear an investment claim.[7]   

The ICSID Convention is a treaty that establishes the jurisdiction of the ICSID and authorizes arbitration between investors and states.  The ICSID Convention has 159 contracting states, including China and more than 40 African countries, as of January 2015.[8]   For awards rendered pursuant to the ICSID Convention, all State parties to the ICSID Convention bear an international obligation to recognize and enforce an ICSID award as if the award is a final decision of its local court.  That is to say, if a Chinese investor has been awarded compensation in an international arbitration, it is not limited to seek enforcement of that award in that African country where its investment is made.  Rather, enforcement can be sought in other ICSID Convention contracting states where that African country’s asset exists.  

More importantly, the self-contained review system (the annulment proceeding) within ICSID further reduces the uncertainties that may arise from attempts to challenge the awards by the respondent State before any courts.  

For non-ICSID awards, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) applies to ensure that courts of contracting states will recognize and enforce arbitration awards made in other contracting states.  Similar to the ICSID Convention, under the New York Convention, an arbitration award made in any other state can generally be freely enforced in any other contracting state with one exception: enforcement is subject to the review of local courts where such enforcement is sought and could be rejected on certain limited grounds.[9]   As of January 2015, the Convention has 154 state parties, including China and more than 30 African countries.[10]   

In summary, the ICSID Convention and the New York Convention provide a high degree of assurances to the investors that an arbitral awarded will eventually be enforced against the host state.  This is yet another advantage compared to litigation before a court at the host state.

Conclusion

Chinese Investors into Africa may take a good degree of comfort from the ISDS provisions enshrined in all BITs between China and African countries to provide an important element of investment protection.  The ISDS mechanism has established itself as the optimal way for resolving investment disputes between investors and host states, by granting the disputing parties increased control over the arbitral process[11], and by ensuring enforceability of the awards.

[1] Chapter 11 of MOFCOM’s 2014 commerce work summary

[2] It is generally accepted that in the International Law Commission Draft Articles on Responsibility of States for Internationally Wrongful Acts codifies such rules.

[3] See e.g. Article 1.1 of the South Africa – China BIT.

[4] China – Ghana BIT, Art. 10(1).

[5] China –South Africa BIT, Art. 9(1); China – Nigeria BIT, Art. 9(1).

[6] For example, Art. 9(3) of China – Nigeria BIT and Art. 9(2) of China – South Africa BIT.

[7] African countries that consent to arbitration in ICSID in BITs with China include: Morocco, Gabon, Cameroon, Ethiopia, Congo Rep., Botswana, Sierra Leone, Mozambique, Kenya, Cote d'Ivoire, Djibouti, Benin, Uganda, Tunisia, Equatorial Guinea, Madagascar, Seychelles, Mali, Chad, Libya, Tanzania.

[8] For a list of contracting states of the ICSID Convention, please see the ICSID website

[9] Article V of the New York Convention limits the grounds for non-recognition or enforcement to a narrowly-drafted list.  The respondent state has to prove one of the following: lack of a valid arbitration agreement, violation of due process, excess of the arbitral tribunal’s authority, irregularity in the composition of the arbitral tribunal or arbitral procedure, and the award “has not yet become binding”, “has been set aside” or “has been suspended”.

[10] Please see the United Nations Commission on International Trade Law website  

[11] Compared to settlement by national courts, arbitration allowed the parties to exercise more control over the litigation procedure, as parties in dispute were able to appoint arbitrators of their choice. 

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