This article is written by Nabira Farman who is pursuing a Certificate Course in International Commercial Arbitration and Mediation from LawSikho.
The EU-China Comprehensive Investment Agreement between the European Union and China was declared in principle on 30 December, 2020 (CAI). For both parties, in the long-term negotiations which started in 2012 this represents an important step. Brussels released some drafted parts that are still under negotiation between China and the EU on 22 January 2021 in the interests of transparency (Draft CAI). The Draft CAI offers a useful overview of the final legal text of the Treaty. The media’s emphasis on market access commitments and stated ambitions by both parties in terms of maintaining labour, environmental and sustainability standards have been considerable. This note deals with the rules on conflict settlement. There is inevitably substantial confusion with regard to the nature of the final settlement of disputes and investment security mechanisms. However, it revealed the course travelling in these areas in the Agreement in Principle and parts of the CAI Draft.
To a greater extent, both parties seem to have decided in the context of the State-State conflict settlement to follow some of the main features of recent EU investment treaties. But a treaty on investor rights and the Investor-State Dispute Settlement (ISDS) seems likely to be concluded separately at a later stage. In this respect, in line with the wider effort it has made to create a Multilateral Investment Court, the EU appears to press for the formalised dispute resolution institutions. It remains to be seen how China will react to this initiative, but any new agreements once in effect seem likely to replace China’s bilateral investment treaties (BITs) with different EU Member States.
State-State Dispute Settlement
Section V of the Draft CAI provides for procedures for State-State dispute settlement to settle “any dispute over the understanding and implementation of the provisions of the CAI. They are used to fulfil CAI agreements between China and the EU, like market access or climate change combating.
These draft articles are analogous to WTO rules and to the resolution of state-state disputes in additional agreements concluded by the European Union in recent years with Singapore, Vietnam and Canada and the United Kingdom. It also reflects the main principles of the resolution of the conflict between States as set out in the Agreement in Principle. The following principles are:
“A reliable, effective and open process to prevent and resolve conflicts concerning allegations of infringements between the Parties.
A two-stage approach focused on consultations (and the opportunity to mediate) to attempt to arrive at a mutually agreed solution and to go for arbitration panel protocol when no solution is arrived among the parties.
Specific guidelines to set up and compose an arbitration tribunal, with highly trained, expert and impartial panellists subject to a high standard of ethical conduct.
Compliance and post-compliance steps are simplified and clearly defined (including retaliation).
Arbitral Panel must include Rules of Procedure which contain comprehensive rules for panel hearings and elaborated codes of conduct to ensure complete independence, integrity and impartiality of the panellists.”
Some remarkable features in Section V of the Draft CAI
An obligatory consultation process within a given time frame before arbitration can start by either party. The parties can attempt at any time to resolve disputes by mediation, even if it is wholly voluntary to use mediation.
The arbitration panel shall consist of three members if the arbitration is commenced. Both Parties shall try to agree on the appointment of all three of them. In cases where such an arrangement is not reached, persons in three sub-lists shall be picked as the arbitrators.
The drafted CAI also includes conformity assessment protocols and counter measures in line with recent EU treaties, in order to ensure that a panel decision is complied with.
The Panel has released the draft Rules of Procedure as Appendix I to Section V. They cover a broad range of issues, from the initiation of arbitration to the costs. This constitutes a bid to “institutionalise” the state arbitration process. It contrasts with the past bilateral treaties between China and different EU Member States. For example, the China-Germany BIT does not contain any accepted procedural rules and instead states that its procedure is to be determined by the arbitral tribunal itself.
There are continuous discussions on the Code of Conduct for the Arbitrators, while the EU promised in February 2021 to publish a copy. A number of such suggestions have been made by the EU in other fora before and this is a significant field to be observed.
Conflict settlement between investor and state
No ISDS clauses are included in the drafted CAI. Rather, there is an undertaking by both the signatories to pursue an agreement on this issue in the future in the Agreement in Principle. The Agreement in Principle states:
To conclude negotiations on investment rights and the resolution of investment disputes within the 2 years following the signing of the CAI, the agreement reached between China and EU requires the commitment of both sides. The popular aim is to work towards modernised standards of security and a resolution of disputes that takes account of the work done by UNCITRAL on a Multilateral Court of Infrastructure. The aim of the EU remains to upgrade and replace the Bilateral Investment Treaty between the current Member States and China.
Substantial levels of investment security
Currently, there are 25 BITs, each of which includes different levels of investment security, between China and the EU Member States. As the Principle Agreement proposes, the standardisation of the degree of security would be a priority of EU and China negotiations. It will be important to see how each side interprets the goal to “modernise” the degree of investment security and replace existing BITs. Many BITs are decades old, between China and the EU Member States, and depend on the presumption that investment flows from the EU to China and not the other way round.
“Modernised standards of protection” as per the Agreement in Principle
The Draft CAI also reflects what in the eyes of the parties are the modern security criteria and future treaties may also consider it. This includes:
The emphasis of these negotiations was on the national treatment of foreign investors. Article 4 of Section 2 talks about investment liberalisation and promotes that each Party shall, in such circumstances, grant to the investors of the other Party and protected businesses no less favourable treatment than the treatment it grants with regard to the set-up and activity on its territory to its own investors and to their company. This has become important in particular because many of China’s older BITs do not include national care requirements for the post-establishment era. Some recent changes in Chinese domestic law should be taken into account.
For example, the Chinese Foreign Investment Law (CFIL), passed in early 2020 defined a national system of management of the “pre-establishment national treatment and negative list.” In several important sectors, the implementing regulation of the CFIL often includes domestic care for companies with foreign investors.
Most Favoured Nation Treatment
Section II’s article 5 sets out the concept of most favoured nation treatment with a simple exclusion from ISDS procedural or jurisdictional implementation.
Right to Regulate
Section III of the Draft CAI is a comprehensive provision on the “Regulatory framework” which means that the parties can seek to agree on provisions designed to protect the “right to regulate” of States, such as in the field of environmental and social matters.
Investor-State Dispute Settlement Mechanism
The Agreement in Principle shows that the EU and China have reached an understanding to take account of UNCITRAL’s work on the Multilateral Investment Court of the dispute settlement mechanism between the investor and the State resulting from any final investment security agreement.
Since 2017, the Working Group III of UNCITRAL is required to suggest changes to existing ISDS systems and practises. A possible reform path, welcomed by the EU, is the establishment of a permanent Multilateral Investment Court to replace the existing ISDS clauses in the various BITs or other investment security treaties or chapters. In its latest investment security treaties with countries like Canada, Singapore and Vietnam, the EU has negotiated a modernised dispute resolution process, replacing the existing ISDS investment-state-arbitration model with a new two-state investment court structure and agreed to use a multilateral investment tribunal in the future in these treaties.
In the past, there have been relatively few Chinese support for a permanent Multilateral Investment Court. China supports the concept of an ISDS permanent appeal body but has not so far expressed approval of the EU’s plan to set up a multilateral first instance court. Furthermore, in the appointment of an adjudicator, the EU proposes a permanent mechanism of long and staggered adjudicators (i.e. their terms of office are not simultaneously expired) with the same body of adjudicators who will randomly establish panels on individual cases. In comparison, China is adopting a more conventional position, highlighting the autonomy of the Party to pick and appoint arbitrators, at least in a first instance position.
Any other areas of consensus or possible convergence tend to be in place. For instance, China and the EU seem to share the goal of reinforcing ethical standards to prevent arbitrator conflicts of interest. China has also suggested that alternative dispute settlement provisions be included and suggests constructive exploration of the development of a more efficient investment conciliation process. The EU is also proposing expanded institutional aid for conciliation and investment dispute mediation.
China has also suggested that alternative dispute settlement provisions be included and suggests constructive exploration of the development of a more efficient investment conciliation process. The EU is also proposing expanded institutional aid for conciliation and investment dispute mediation.
Investment security and conflict settlement mechanisms may not yet have received the same amount of media coverage as some of the other thematic questions posed by the CAI in the coming CAI and its Principles Agreements. These are, however, key elements of the treaty between the two biggest economies worldwide. A reasonably straightforward picture of the settlement of disputes by the State was drawn in the Draft CAI. The Agreement in Principle and some articles of the CAI document would also provide instructions on the positions that are likely to be taken by both parties in their investment security and ISDS negotiations. The EU appears at least to be a centrepiece of the agenda for modernising investment protecting and moving towards a multilateral investment court.
References Lai K, “PRIMER: EU-China Comprehensive Agreement on Investment” (International Financial Law Review, February 23, 2021) <https://www.iflr.com/article/b1qp5tynld2h1h/primer-eu-china-comprehensive-agreement-on-investment> accessed April 23, 2021
 “The Pitfalls of the China-EU Comprehensive Agreement on Investment” (Thediplomat.com, January 22, 2021) <https://thediplomat.com/2021/01/the-pitfalls-of-the-china-eu-comprehensive-agreement-on-investment/> accessed April 23, 2021
 “The EU-China Comprehensive Agreement on Investment: A Tale of Sound and Fury” (Ejiltalk.org, February 9, 2021) <https://www.ejiltalk.org/the-eu-china-comprehensive-agreement-on-investment-a-tale-of-sound-and-fury/> accessed April 23, 2021
 “The EU-China Comprehensive Agreement on Investments – Promoting Sustainable Business and Human Rights through Investment Arbitration – American Review of International Arbitration” (Columbia.edu, February 25, 2021) <http://aria.law.columbia.edu/the-eu-china-comprehensive-agreement-on-investments-promoting-sustainable-business-and-human-rights-through-investment-arbitration/> accessed April 25, 2021
 “The EU-China Comprehensive Agreement on Investment: A First Glance | JD Supra” (JD Supra2021) <https://www.jdsupra.com/legalnews/the-eu-china-comprehensive-agreement-on-4647714/> accessed April 24, 2021
 “What Does the Draft European Union–China Comprehensive Agreement on Investment Mean for Sustainable Development?” (International Institute for Sustainable Development2021) <https://www.iisd.org/articles/what-does-draft-european-union-china-comprehensive-agreement-investment-mean-sustainable> accessed April 24, 2021
 Jacobs and Han D, “The EU-China Comprehensive Agreement on Investment: A First Glance” (Lexology.com, February 5, 2021) <https://www.lexology.com/library/detail.aspx?g=f697ef69-5463-49d0-afa3-e45b74aba923> accessed April 25, 2021
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