Challenges and Opportunities of Investor-State Dispute Settlement Reform in China

In the past five years, the overall legal environment of investor-State dispute settlement (ISDS) has changed dramatically in China. At the international law level, the fourth generation of Chinese bilateral investment treaty (BIT) further loosens restrictions on the ISDS system. It allows foreign investors to submit any disputes arising from a BIT to any international arbitration forum other than the International Centre for Settlement of Investment Disputes and ad hoc tribunals, subject to certain prerequisites. Nearly all international investment arbitration involving a Chinese party has occurred in the past decade, and more than half of the cases were initiated after 2015. At the domestic law level, article 26 of the newly enacted Foreign Investment Law specifies the three domestic disputes mechanisms that a foreign investor and/or its invested-enterprise registered in China may approach over investment disputes with administrative agencies: the Complaint Mechanisms for Foreign-Invested Enterprises, administrative review and administrative litigation. These domestic proceedings are not only available to foreign investors under domestic law but also an essential part of the ISDS clause in Chinse international investment agreements.

This thesis examines the current ISDS mechanisms in China from both domestic and international aspects, covering the legal basis, features, advantages and disadvantages of the three domestic proceedings and international treaty arbitration. The three domestic proceedings benefit investors and their invested enterprises in multiple ways, but are prone to external influences, especially from domestic administration agencies. Moreover, the qualifications of staff members in the complaint centres and administrative review agencies are often questionable. In contrast, international arbitration seems to be a more independent and impartial dispute resolution mechanism for foreign investors. However, it is facing growing criticisms, including inconsistency and incoherence of awards, lack of correction system, doubts as to the arbitrator’s professionalism and independence, long duration and high costs, lack of regulation of third-party funding and lack of transparency. These issues have occurred in Chinese BIT practices and investment arbitration cases involving a Chinese party.

To respond to the trend of reforming the ISDS system and competing for the future market share of investment arbitration, three China-based arbitration centres recently promulgated new arbitration rules expanding their business scope to international investment arbitration. In particular, the China International Economic and Trade Arbitration Commission (CIETAC) and Beijing Arbitration Centre (BAC) engage innovative systems in their investment arbitration rules, including an appeal phase and an expedited procedure. Foreign investors may benefit from submitting investment disputes before these China-based arbitration centres under the new arbitration rules because the rules may mitigate parties’ concerns about the current ISDS system. In addition, foreign-invested enterprises that are wholly or partially owned by foreign investors might also take advantage of the new CIETAC and BAC arbitration rules. Nevertheless, all three sets of new arbitration rules face practical difficulties in China and questions about the impartiality of when handling investor-State arbitration.

The thesis concludes that the conditions for implementing these arbitration rules are not met at this stage, unless there will be a thorough modification of China's arbitration system. It would be a more effective solution for the sake of foreign investors and the Chinese government to allow administrative arbitration initiated by foreign investors and/or their invested enterprises registered in China against Chinese administrative agencies or even the state under domestic law.