24 August, 2012
On 9 August 2012, after two years of negotiation, Mainland Chinese and Taiwanese negotiators signed two cross-strait agreements; the Cross-strait Bilateral Investment Protection and Promotion Agreement ("IPA"), and the Cross-strait Customs Cooperation Agreement. The IPA is expected to further promote cross-strait economic exchanges and to attract more Mainland Chinese investors into Taiwan and vice-versa. A copy of the IPA (only available in Chinese) can be found here.
Background
The two cross-strait agreements were signed on 9 August 2012 by the "Association for Relations Across the Taiwan Straits" (representing Mainland China) and the "Straits Exchange Foundation" (representing Taiwan). They are the first protocols reached since the landmark cross-strait Economic Cooperation Framework Agreement ("ECFA"), which was signed on 29 June 2010 and came into effect on 1 January 2011. The ECFA set out the framework and objectives for formal agreements between China Mainland and Taiwan to be concluded later.
Investment protections afforded by the IPA
The IPA provides common protections for investors that are regularly found in investment treaties, such as the right to fair and equitable treatment and protection against expropriation. In addition, the IPA requires the parties to adopt transparent investment-related rules, measures and procedures, to gradually remove restrictions on investments and to facilitate and encourage investment between Mainland China and Taiwan.
The IPA also enlarges the scope of protection to investors by expressly granting protection for investors that make their investment in Mainland China or Taiwan indirectly via a third country (e.g. Cayman Islands or British Virgin Islands).
Dispute resolution mechanisms under the IPA
The IPA distinguishes between different types of disputes, which can generally be identified as:
(1) Investment Disputes: disputes arising between a qualifying investor and the government of the host country, including:
- Investment Compensation Disputes: where an investment made by a qualifying investor is expropriated by the government of the host country and there are disputes over compensation; and
- Other Investment Disputes: all other disputes arising between a qualifying investor and the government of the host country excluding expropriation claims.
and
(2) Commercial Disputes: commercial disputes arising out of an investment between private investors where the government of the host country is not a party to the dispute.
Given the sensitivity of cross-strait relations (China does not recognise Taiwan as an independent state), the IPA has not expressly incorporated international arbitration as a dispute resolution mechanism for Investment Compensation Disputes and Other Investment Disputes arising out of the IPA, although this point generated significant debate, with Taiwan pressing for the ability for investors to resort to international arbitration to settle disputes.
The dispute resolution options contained in the IPA are explained below.
Investment Compensation Disputes
Article 13 of the IPA sets out the dispute resolution mechanisms available to investors for Investment Compensation Disputes arising from cross-strait investments. There are five options of dispute resolution procedures available under Article 13:
- Negotiations between the disputing parties;
- Coordination via local dispute settlement authorities;
- Conciliation with the assistance of the investment division of the Cross-Strait Economic Cooperation Committee;
- Mediation via cross-strait dispute resolution institutions following the mediation procedures for investment compensation disputes provided in the Annex to the IPA; or
- Administrative remedies or judicial proceedings.
The IPA does not provide any further detail regarding the first, second, third and fifth options above. However, in respect of the fourth option, the IPA expressly sets out the procedures to be followed, which are explained in detail below.
Mediation
The procedures for mediation of Investment Compensation Disputes (the fourth option listed above) are set out in the Annex to the IPA and are applicable only to disputes arising between an investor and the government of the host country relating to an alleged expropriation of an investment. Pursuant to the Annex, the mediation proceedings are private unless otherwise agreed by the disputing parties and are to be administered by "cross-strait dispute resolution institutions". These are defined as "arbitration institutions, mediation centres and other mediation institutions confirmed by, and having received written notifications from, both Mainland China and Taiwan". At this stage, it remains to be seen which arbitration and mediation institutions will be confirmed as "cross-strait dispute resolution institutions", including whether any international institutions will be included.
Under the IPA, the remedies for Investment Compensation Disputes include pecuniary compensation, restitution of property (or economic compensation with interest) and "other legitimate remedial methods" agreed by the disputing parties (the IPA does not specify what other legitimate remedial methods are). The limitation period for requesting mediation of an Investment Compensation Dispute under the IPA is three years from the time when the investor knows, or ought to know, of the other party's alleged breach of its obligations under the IPA.
Other Investment Disputes
For Other Investment Disputes, investors can select any of the options under Article 13 of the IPA, with the exception of mediation via cross-strait dispute resolution institutions, which is not available for Other Investment Disputes.
Commercial Disputes
Commercial Disputes are disputes that arise between an investor of a contracting party and natural persons, legal entities or other organisations of the other contracting party. Article 14 of the IPA provides that, in the event that both parties consent, such disputes may be submitted to arbitration under the auspices of arbitration institutions in Mainland China, Taiwan, and Hong Kong. The arbitration agreement may be entered into either at the time of entering into the commercial contract, or after the dispute has arisen. The place of arbitration can be Mainland China or Taiwan, or any other place outside of Mainland China or Taiwan, e.g. Hong Kong or Singapore, if agreed by the disputing parties. Enforcement of the arbitral award would be through the relevant local courts on either side of the strait.
Personal freedom and safety issues related to cross-strait investment
In addition to signing the IPA, which is expected to take effect by the end of 2012, both sides also published a statement of common understanding on personal freedom and safety issues under the IPA. Pursuant to this statement, Mainland China and Taiwan have agreed that in circumstances where restrictions are placed on the personal freedom of a qualifying investor in the host country, the authorities of the host country will be required to inform the investor's relatives or the enterprise in which the investor invests of the detention within 24 hours.
Conclusion
The IPA is a big step forward for promoting and improving cross-strait investment and building closer economic and cultural ties between Mainland China and Taiwan. However, it remains to be seen how the IPA will work in practice. For example, it is uncertain whether arbitration institutions and mediation centres will be designated qualified organisations to handle cross-strait Investment Compensation Disputes, and whether the enforcement of arbitral awards or settlement agreements reached under the IPA will present any practical difficulties. For these reasons, investors wishing to participate in cross-strait investment should ensure that their agreements adopt clear dispute resolution mechanisms.
For further information, please contact:
Justin D’Agostino, Partner, Herbert Smith
justin.d’[email protected]
Jessica Fei, Partner, Herbert Smith
May Tai, Partner, Herbert Smith
Brenda Horrigan, Partner, Herbert Smith