ON THE APPLICATION OF THE PRINCIPLE OF
PROPORTIONALITY IN ICSID ARBITRATION AND
PROPOSALS TO GOVERNMENT OF THE
PEOPLE'S REPUBLIC OF CHINA
HAN XIULI '
I. INTRODUCTION
The proportionality principle applied by the International Centre for
Settlement oflnvestment Disputes (ICSID) has not caught the attention
of Chinese scholars or authorities. Even though the principle is applied
throughout courts and tribunals such as the Pennanent Court of
Intemational Justiee, the Ititernational Court of Justice and the Dispute
Settlement Body of WTO, its application by ICSID seems to have just
begun. Inasmuch as the application of the proportionality principle will
affect the sovereignty of the host state more severely, and considering
that from the perspeetive of China, most of the Chinese new round
bilateral investment treaties (BITs) tend to accept ICSID jurisdiction
across the board, and China is not very good at the administration of
foreign investment, in the future, the principle of proportionality might
be used in ICSID arbitration to challenge the Chinese government's
regulatory power. This article discusses these issues in four seetions.
Firstly, it broadly explains what the principle of proportionality
properly means, especially compared with relevant principles in
intemational investment law. It eoneludes that the proportionality
principle is more demanding and has more effeets on the host state's
regulatory rights to foreign investment than the principle of nondiserimination.
In ease it is considered as a key element of the fair and
equitable treatment principle, it will be the biggest deterrent to the host
regulatory power. Secondly, the article introduces the application of the
'Doctor of Internalional Economic Law, Associate Professor, Xiamen
University School of Law and Intemational Economic Law Institute. People's
Republic of China. This paper is the outcome of a doctoral degree dissertation
project of Xiamen University and is also a pari of task of Ministry of Justice
P.R.C., No. O6SFB3O28. The author may be contacted at:
hanxiu777@xmu.edit.cn. The author wishes to thank in particular Professor
Malinda L. Seymore for her comments.
234 Hun Xiuli
principle of proportionality in Teemed v Mev/co'and subsequent cases.
Above all, the effects of applying the proportionality principle in ICSID
arbitration are analysed. Thirdly, the article outlines the realities and
trends of Chinese practices in the BITs, and points out the severe
problems within them. Finally, this article offers eonerete proposals to
the Chinese govemment from the aspeets of laws and faets.
II. AN EXPLANATION OF THE PRINCIPLE OF PROPORTIONALITY
A. Introduction to the Principle of Proportionality
Generally speaking, the principle of proportionality deals with the
relationship between end and means, and it demands there should be a
reasonable relationship of proportionality between the means employed
and the aim sought to be realized. Its underlying concept is to balance
conflicting or competing benefits.' But in my opinion, conflicting
benefits should be between publie benefits and private benefits, a fair
balance between the competing public and private interests is the
objeetive of applying the proportionality principle, however, we eannot
say that balance of benefits amounts to the proportionality principle.
After comprehensively considering municipal law, European
Community law, and intemational law, we may conclude that the
proportionality prineiple constrains the power of states or intemational
organizations, but protects private rights so as to balance different
benefits. The principle of proportionality is also a structural concept
that includes three sub-principles, the principle of suitability, the
principle of necessity, and the principle of proportionality .stricto sensu.
The principle of suitability requires that the means be suitable or
helpful to achieve the legitimate objectives, ie, the end itself must be
legal and justifiable firstly. ^ The prineiple of necessity requires that the
' ICSID, Case No. ARB/00/2 Award (2003)
<www.worIdbank.org/icsid/cases/laudo-051903%20-English.pdf> at 7 May
2006.
" Jost Delbriick, 'Proportionality', in Rudolf Bernhardt (ed), Encyclopaedia of
Public International Law Volume III {1997) 396.
This is a controversial question, some authors argue it is not included in the
proportionality principle, see Zhii Weiguo. Rising stars over Europe : Selected
Dissettation frotn EU-China Legal and Judicial Co-operation Programme
(2003) 595, but others argue it is included in the proportionahty principle, see
Michael Gruenberger, A Duty to Protect The Rights of Performers?
Constitutional Foundations of An Intellectual Property Righl. (2006) 24
Cardozo Atts & Entertainment Law Journal 676.
AppliciUion of the Principle ofProportionalit\> in ICSID .-irbitration 235
means be necessary to aehieve the end and if there are any other less
restrictive means to the applicants' interests capable of producing the
same result, the less restrictive means should be adopted. The prineiple
of proportionality stricto sensu demands that the means not excessively
restriet the affected interests, eompared with the interests pursued. The
neeessity prineiple is subsequent to the suitability prineiple. and
demands comparison and ehoiee among the different means with the
same end. However, aceording to the prineiple of proportionality stricto
sensu, namely, the true proportionality prineiple means, if the harm
exceeds the benefits that the means pursue, and the side-effeets will be
too mueh, the end should be abandoned. Therefore, if the end is very
signifieant, the means are more likely to be eonsidered legal.
In the European Union, the prineiple of proportionality is beeoming a
constitutional principle.^ The prineiple also exists in international law
and is spreading to various branches. In the fields of self-defenee,
retaliation, eountermeasures, humanitarian law, and human rights law,
the prineiple of proportionality has beeome customary intemational
law.'' The existenee of the prineiple of proportionality in WTO law has
1 support the fornier, this opinion also has been confirmed by plenly ofjudicial
decisions of the European Court of Justice and the European Court of Human
Rights, and even a domestic court. For example, in the case of R v Sharpe
[20Ü1] 1 SCR 45, 183-110. there, as the first slep in showing the
proportionality, ralional connection is tested, minimal impairment is the
second prong of the proportionality test, and proportionality is the final
balance.
"* See Takis Tridimas. The General Principles of EC Law, (1999) 91-92;
Nicholas Emiliou. The Principle of Proportionality in European Law: A
Comparative Study (1996) 26-36; Meihard Hilf and Sebastian Puth. 'The
Principle of Proportionality on its Way into WTO/GATT Law', in Armin Von
Bogdandy and Petros C. Mavroidis (eds), European Integration and
International Coordination: Studies in Tratisnational Economic Law in
Honour of Claus-Dieter Ehlertnanu (2002) 199-218.
^ The use of Union competences is governed by the principle of subsidiarity
and proportionality. Under the principle of proportionality, the content and
form of Union action shall not exceed what is necessary lo achieve the
objectives of the Constitution. The institutions of the Union shall apply the
principle of proportionahty as laid down in the Protocol on the application of
ihe principles of subsidiarity and proportionality. Treaty Establishing a
Cofistitution for Europe, opened for signature on 29 October 2004, [2004] OJ
C 310, art 1-11, para 1. 4, in Barry E. Carter (ed), Lnternational Law: Selected
Docutnents (2005) 298-299.
*• See Tanaka Yoshifumi, 'Reflections on the Concept of Proportionality in Ihe
Law of Maritime Delimitation' (2001) 16 The International Journal of Marine
and Coastal Law 433, n 1.
236 lian Xiiili
indisputably been proven by reviewing legal texts and related judicial
decisions. In legal texts, the phrases 'least trade restriction', 'necessary'
and 'equivalent', embody the principle of proportionality. In judicial
decisions, the proportionality prineiple requires that trade restrictions
not be excessive to accomplish other legitimate objectives, and it tries
to balance free trade and other interests. '' It is obvious that under
different eireumstanees, the proportionality principle is used to
harmonize different interests.
B. The Relationships with Related Principles
In intemational investment law, major principles related to the prineiple
of proportionality include the non-discrimination treatment prineiple
and the fair and equitable treatment principle. The significance of
applying the prineiple of proportionality in ICSID arbitration ean be
clarified through comparing it with other relevant principles.
1. Non-discrimination treatment principle
In intemational investment law, the national treatment (NT) prineiple
and the most-favoured nation treatment (MFN) principle embody and
guarantee the realization of the non-diserimination treatment principle.
Under the NT principle, the host state should offer the foreign investor
and corresponding investment no less favourable treatment than the
treatment offered to national investors and corresponding investment.
The NT principle reflects a kind of relative treatment standard, and the
reference standard is the treatment of national investors and
eorresponding investment. The MFN principle means that the treatment
given to foreign investors and eorresponding investments should not be
less favourable than the treatment given to the third state investor and
corresponding investment. Therefore. MFN is also a relative treatment
standard and the treatment that the foreign investor and corresponding
investment can expect depends on the treatment standard given to the
third state investor and corresponding investment.
However, under the proportionality prineiple, a measure's legality docs
not depend on whether the measure is applied equally. Even an equally
applicable measure must confomi to the demand that the end be legal
and the means necessary. This has also been reflected in the elause of
the Korca-US Free Trade Agreement:
^ See Han Xiuli, On the Principle of Proportionality in WTO Law (2007)
Chapter 2.
Application ofthe Principle ofProportionality in ¡CSID Arbiirulion 237
Except in rare circumstances, such as, for example, when a
measure or series of measures is extremely severe or
disproportionate in light of its purpose or effect, nondiscriminalory
regulatory actions by a Party that are
designed and applied to protect legitimate public welfare
objectives, such as public health, safety, the environment,
and real estate price stabilization (through, for example,
measures to improve the housing conditions for low-income
households), do not constitute indirect expropriations.*^
As one commentator points out, 'non-discriminatioti is not an easy
applicable examination because it must involve necessity and
proportionality examination when carrying out the non-discrimination
treatment principle'.'' Some writers also consider that a discriminatory
measure only confonning to the principle of proportionality ean be
legitimate. For example, McKean believes that discriminatory treatment
is legitimate if it aims at pursuing a legitimate end, has objective
reasons, and the means employed to achieve the end are
proportionate.'^
From time to time, the application of the proportionality prineiple is
entangled with the non-discrimination treatment principle. " For
example, in the case of A v Secretary of State for the Home
Departtnent, as part of their proportionality argument, the appellants
attacked s 23 as discriminatory. They contended that, being
discriminatoiy, the section eould not be 'strietly required' within the
meaning of article 15 and so was disproportionate. Among others, Lord
Hope of Craighead held that:
I would hold that the indefinite detention of foreign nationals
without trial has not been shown to be strictly required, as
the same threat from British nationals whom the government
is unable or unwilling to prosecute is being met by other
measures which do not require them to be detained
indefmitely without trial. The distinction which the
government seeks to draw between these two groups- British
** Free Trade Agreement between the Republic of Korea and the United States
of America, June 30, 2007, Annex 11-B (3)b
< http://www.mofat.go.kr/index.html> at August 7. 2007.
" Joe! P. Trachtman, 'Lessons for the GATS from Existing WTO Rules on
Domestic Regulation', in Aaditya Mattoo and Pierre Sauvé (eds). Domestic
Regulation and Setrice Trade Liberalization (Fang Liying trans, 2004 ed) 61.
'" See WA. McKean. 'The Meaning of Discrimination in Intemational and
Municipal Law" (1970) 44 British Year Book oflnternatiotml Law 287.
' ' See Dean Milk Co v City of Madison, 340 US 349 ( 1951 ); Maine v Taylor,
477 US 131 (1986).
238 Han Xiuli
nationals and foreign nationals-raises an issue of
discrimination. But. as the distinction is irrational, it goes to
the heart of the issue about proportionality '^
In eonelusion. non-discriminatory treatment is only a 'relative'
treatment standard; it cannot guarantee the investment measure will not
restrict and impair foreign investment excessively, or that the foreign
investor and corresponding investment has been treated fairly and
reasonably.'* It only ensures the treatment of the foreign investor and
corresponding investment is not less favourable than that enjoyed by
the like national investor and corresponding investment or the third
state investment. In contrast, the principle of proportionality (including
suitability, necessity, and proportionality stricto sensu) affords an
'absolute' standard which requires a country to provide certain
treatment to foreign investors and eorresponding investment.
Reasonableness does not depend on the treatment conferred on national
or third state investment. Compared to the non-discrimination
treatment, the principle of proponionality's restrictions on state
measures regulating investment appear more onerous with greater
intervention of the international legal system in state regulatory power.
Thus even if an investment measure adopted by a state meets the nondiscrimination
treatment principle, it might not satisfy the requirements
of the proportionality principle. Furthermore, in most cases, it is easier
and more objective to judge the existence of discrimination than the
laek of proportionality, because the standard of discrimination is
expressed such as nationality, race, gender, sex, ethnie or soeial origin,
colour, sexual orientation, age, disability, religion, conscienee, belief,
eulture or language, and so on, but the standard of proportionality often
has to depend ultimately on the facts and the conscience of judges or
arbitrators.
^^ A V Secretary of State for the Home Department [2004] UKHL 56,
(Lord Hope of Craighead).
'^ On the relativity of non-discrimination treatment principle and absoluteness
of the principle of fair and equitable treatment, see Catherine Yannaca-Small,
IVorking Papers on International Investment. Fair and Equitable Treatment
Standard in International Investment Law (2007) Organisation of Economic
Cooperation and Development
<http://www.oecd.org/dataoecd/22/53/33776498.pdf^ at 4 May 2007.
Application of the Principle ofProportionaiity in ICSID Arbitration
2. Thefair and equitable treatment
The principle of proportionality is more concrete than the fair and
equitable treatment principle. Although fair and equitable treatment is
an important standard in investment protection agreements, it is a very
flexible eoneept with an ambiguous definition. Different
understandings exist between developing countries and developed
countries. Most developing eountrics consider that the standard tor
judging the treatment of foreign investment as fair and equitable
depends on the actual eireumstances in the host state. Developed
countries strongly argue that the baseline of fair and equitable treatment
to foreign investors and corresponding investments is an 'international
minimum standard of treatment'.''*
However, traditionally, the fair and equitable treatment principle has
not been regarded as ineluding the principle of proportionality.
Reeently, some seholars have advanced this opinion. For instanee, in
the book edited by Professor Muchlinski, chief adviser of the United
Nations Conference on Trade and Development, it is stated that:
The concept of fair and equitable treatment is not precisely
defined. U offers a general point of departure in formulating
an argument that the foreign investor has not been well
treated on account of discrimination or other unfair measures
being taken against its interests. It is, therefore, a concept
that depends on the interpretation of specific facts for its
content. At most it can be said that the concept connotes the
principle of non-discrimination and proportionality in the
treatment of foreign investors.'"''
This argument regards the principle of proportionality as included in
the fair and equitable principle. This offers the legal system a basis for
the application of the prineiple of proportionality in investment
arbitration, it may also be regarded as an addition to the definition of
the fair and equitable treatment prineiple. In faet, a eertain ICSID
arbitration ease has related the prineiple of proportionality to the fair
and equitable prineiple. In MTD v Chile, the parties aeeepted that the
host state was obligated to treat the investment fairly and equitably.
The parties also agreed with Judge Schwebel's statement that 'the
meaning of what is fair and equitable is defined when that standard is
'•^ Sec Fair and Equitable Treatment, Series on Issues in International
Investment Agreements, [31-32], UNCTAD/lTE/IlT/11 (1999).
'^ J. P. Laviec, Proteetion Et Promotion Des Investissetncnts: Étude De Droit
International Économique {\9%5) 95. cited by Peter Muchlinski, Multinational
Enterprises and the Law (1995) 625.
240 lian Xiuli
applied to a set of specific facts, fair and equitable treatment is a broad
and widely-accepted standard encompassing such fundamental
standards as good faith, due proeess, non-diserimination, and
proportionality'. '^' Since the prineiple of proportionality balances
eompeting interests, it seems to be reasonable to regard it as a part of
the fair and equitable principle.
IIL ANALYSIS OF THE APPLICATION OF THE PRINCIPLE OF
PROPORTIONALITY IN ICSID ARBITRATION
A. The Application of the Principle of Proportionality in
ÍCSID Arbitration
The prineiple of proportionality was applied for the first time in
deciding indirect expropriation in Teemed v Mexico. On July 28, 2000,
the elaimant. Teemed, applied to ICSID for arbitration and argued that
the non-renewal of Mexican authority constituted indirect expropriation
of its assets, and breach of the BIT between Spain and Mexieo. The
Arbitral Tribunal analysed Mexico's regulatory investment measures
under the principle of proportionality. The Tribunal noted and
eonsidered the eeonomie impacts and burdens that the measure imposed
on the investor, the regulating investment power of the host state, the
publie interests that the host state intended to protect, and the protection,
including compensation, awarded by law to the investor. The Tribunal
demanded a reasonable relationship between the burden imposed on the
foreign investor and the interest that tlie expropriating measure wanted
to aehieve. The Tribunal eonsidered the reasons for the non-renewal,
and whether such reasons could render the measure proportional to the
deprivation of rights sustained by the investor and the negative
economic impacts on the elaimant arising from sueh deprivation.'^The
Tribunal held that the eeonomie and eommereial operations after the
non-renewal of the permit were fully and irrevoeably destroyed,'** and
that these means were disproportionate to the ends.
"•lCSID, SÍTD V Chile, Case No. Arb/01/7 Award (2004) [% 109]
<http://www.asil.org/ilib/MTDvChile.pdf^ at 5 May 2004.
'^ ICSID, Teemed V Mexico. Case No. Arh/(AF}/00/2 Award (2003) [1122, 132]
<http://www.worldbank.org/icsid/cases/lado-051903%/020-EngIish.pdi> at 15
November 2007.
"Ibid 111 17.
Application of the Principle of Proportionality in ICSID .-irbitration 241
Since Teemed v Mexico, the prineiple of proportionality has been
applied in subsequent ICSID arbitrations. Teemed v. Mexico seems to
be a strong preeedent. Some seholars have argued that this application
has ereated a judicial preeedent in intemational investment arbitration
and thus is a leading ease in regulatory expropriation. '"^
Soon after Teemed v Mexico was decided, on June 26, 2001, MTD filed
a request for arbitration with ICSID against the Republic of Chile.
ICSID reported its verdiet on May 25, 2004. The verdiet invoked and
developed the jurisprudence of Teemed v Mexico, particularly the
principle of proportionality and the fair and equitable prineiple.'"
In Aticoven v Venezuela, Venezuela emphasised that Aueoven's claim
did not meet the requirement of proportionality stipulated in
Venezuelan law."' In CMS v Argentina, the Argentine government as
Respondent elaimed that the measure it adopted was reasonable and
proportionate to the objeetive pursued."" In Azurix v Argentina, the
tribunal supported the proportionality test approaeh adopted in Teemed
V Mexico, and the US-based water serviees firni Azurix won its elaim
against the Argentine Republic and recouped a portion of its sunk costs,
i.e.. a SI65 million (US) award against Argentina for Argentina's
breaeh of the US-Argentina ^
In LG&E V Argentina, the Tribunal's analysis referred to paragraph 122
of Teemed:
With respect to the power of the State to adopt its policies, it
can generally be said that the State has the right lo adopt
measures having a social or general welfare purpose. In such
a case, the measure must be accepted without any imposition
of liability, except in cases where the State's action is
obviously disproportionate to the need being addressed. The
'^ See Jack J. Coe. Jr. and Noah Rubins, 'Regulatory E.xpropriation and the
Teemed Case: Context and Contributions' in Todd Weiler (edj. International
Investment Law and Arbitration: Leading Cases from the ICSID. NAFTA,
Bilateral Treaties and Customaiy Internatumal Law (2005) 597, 624, 653-56.
'"ICSID, MTD V. Chile. Case No. Arb/Ol/7 Award (2004) [TJI, 114]
<http://www.asil.org/ilib/MTDvChile.pdi>at 5 May 2004.
=' ICSID, Aucoven v Venezuela Case No. ARB/00/5 Award (2003) [T;338]
<www.worldbank.org/icsid/cases/Award Total.pdt^ at 22 February 2007.
" ICSID. CMS V Argentina Case No. ARB/OI/8 Award (2005) [1288]
<www.worldbank.org/icsid/cases/CMS_Award.pdf> at 12 May 2005.
-^ ICSID, Azurix Corp v Argentine Republic. Case No. .4RB/0I/12 Award
(2006) [Ti311] <www.iisd.org/pdf/2006/itn_azurix_argentinajuly.pdf> at 12
May 2007.
242 Han Xiuli
proportionality to be used when making use of this right was
recognized in Teemed, which observed that "whether such
actions or measures are proportional to the public interest
presumably protected thereby and the protection legally
granted to investments, taking into account that the
significance of such impact, has a key role upon deciding the
proportionality.''*
In case of Telenor Mobile Communications A S v Hungary , Telenor
eontcnded that, '[r]egulatory measures pursuing aims other than the
interest of the publie (laek of legitimate aim) or that are disproportional
(laek of fair balanee between the aim sought and means employed)
qualify as expropriation with no doubt.'"^
In Siemens A G v Argentina, the proportionality principle is mentioned
several times. For example, Siemens argued that the State's authority to
modify the eontraet was limited by the proportionality prineiple (Artiele
28 of the Argentine Constitution)."''On whether regulation would be
expropriatory, Argentina referred to the proportionality test advanced in
Teemed v Mexico balancing the measures taken and the public interest
pursued, as well as the deference due to the State when it defines publie
policy issues. '^ Siemens eontended that proportionality and
reasonableness may play a role in assessing whether the expropriation
power was exercised properly. These criteria do not affect the question
whether an expropriation exists or not.''* Siemens also referred to Waste
Management Inc v United Mexican States and MTD v Chile, where the
tribunals used terms sueh as arbitrariness, idiosynerasy, injustice, lack
of good faith, laek of due proeess and proponionality. -''Argentina also
relied on Teemed v Mexico as an example in tenns of eonsidering the
purpose and proportionality of the measures taken. The tribunal
observed that these considerations were pan of its determination of
-^ ICSID, LGáE V Argentina Case No. ARB/02/! Decision on Liability Award
(2006) [T195] <http://ita.law.uvic.ca/documents/ARB021_LGE-Decision-onLiabiiity-en.pdf
> at 12 May 2007.
"' ICSID, Telenor Mobile Communications AS v Republic of Hungary. Case
No. ARB/04/15 Award (2006) [1Í40]
<http://www.worldbank.org/icsid/eases/pdf/ARB0415_telenor-v-hungaryaward.pdf>at
13 September 2006.
'" ICSID, Siemens A.G. v Argentina Case No. ARB/02/8 Award (2007) [T1155]
<http://ita.law.uvic.ea/documents/Siemens-Argentina-Award.pdf^ at 17 May
2007.
='Ibid1¡223.
''Ibid ^238.
""ibid 11285.
Application of the Principle ofProportionality in ICSID Arbitration 243
whether an expropriation had oecurred, instead of its determination of
compensation. '^^
As the above examples illustrate, the term 'proportionality' is beeoming
an inereasingly important concept in ICSID jurisprudence. A number of
standards have been applied in nationalization cases, such as
proportionality, necessity, and non-discrimination. ^'
B. How to Understand the Application of the Principle of
Proportionality in ICSID Arbitration
In theory, ICSID's application of the principle of proportionality aims
to review whether the regulatory investment measure is excessive and
whether it eonstitutes expropriation. An arbitration tribunal analyses
whether the regulatory measure breaches a balance between private
rights and public interests. It also aims to identify the abuse of
regulatory power to promote certain narrow political and eeonomic
interests. According to public choice theory, decisions of political
officers often are subject to the need to achieve short-term politieal
objectives or boost the given benefit they represent. Thus politicians do
not always act in the public interest, and so, judicial review is necessary
to ensure that their actions are not disguised as protectionism, or shady
means to deprive the private sector of its property rights, or malicious
and fictitious exercises of power. From time to time, investment
agreements enumerate (non-exhaustively) public policy objectives such
as health, safety and environmental protection. Protectionist measures
may emerge under the pretext of protecting all kinds of public interests,
even those not listed. For this reason, some scholars think that:
Similarly, the qualification that the regulation be "designed
and applied" to protect "legitimate objectives" invites
consideration of what might be ternied "proportionahty",
both as to the breadth of the regulation and the manner in
which authorities administer the law. Questioning what
objectives are "legitimate" of course only begins the
argument. Notwithstanding a legitimate objective, a facially
unobjectionable regulatory regime may serve as cover for
arbitrary official acts and over-reaching, such that the
original objective is beside the point. Similarly, a clumsy or
^' See Thomas Waelde and Abha Kolo, 'Environmental Regulation,
Investment Protection and Regulatory Taking in Intemational Law" (2001) 50
international & Comparative Law Quarterly 811.
244 lian Xiuli
poorly grounded attempt at regulation may produce a regime
gravely disproportionate in its impact on the foreign investor
in light of the evil to be addressed and the nature of the
ahernatives available to lawmakers.^"
The proportionality principle demands that the measures adopted are
not only for legitimate objectives, but also to keep an appropriate
balatiee between publie and private needs. Therefore, the pritieiple of
proportionality has vast room for application in international
investment arbitration.
In fact, both the judieial praetiee of the European Court of Human
Rights and the regulatory takings jurisprudence of the United States use
proportionality analysis of many elements to decide eomplaints against
regulatory takings. The proportionality approach has been explicitly
adopted in recent U.S. investment treaty practice by explicitly
mandating tribunals to consider the three faetors of the principle of
proportionality in the expropriation analysis.
Although the analysis on the proportionality principle in ICSID
arbitration is tiot detailed, however, the application of the principle of
proportionality has shown a tremendous threat to the regulatory power
of the host state over investment since the measures adopted by the host
state may lose their legitimacy for not conforming to the principle of
proportionality. In Teemed v Mexico, the Arbitral Tribunal concluded
that if the regulatory measure is exeessive eompared to public interests,
it cannot be excluded from the definition of expropriation, and any
burden imposed on foreign investors through expropriation tnust be
proportiotiato to the objeetive pursued. Thus, the tribunal held that
Mexico's regulatory measures were illegal beeause they did not satisfy
the proportionality test. Thus the principle of proportionality is a more
demanding principle which challenges the host state's sovereignty.
IV. SUMMARY OF BITS PRACTICES OF CHINA
Aecording to statistics from the United Nations Conference on Trade
and Development., by February 12, 2007, China has concluded BITs
~ See Jack J. Coe, Jr., 'Emerging Dilemmas in Intemational Economic
Arbitration: The State of Investor-State Arbitration - Some Reflections on
Professor Brower's Plea for Sensible Principles' (2005) 20 American
Universitv International Law Review 943-944.
Application of the Principle of Proportionality in ICSID Arbitration 245
with approximately one hundred and twenty eountries.*'^ Moreover,
China is negotiating and entering into new BITs and modifying the
original BITs. ^"'Sinee China ratified the Convention on the Settlement
of Investment Disputes between States and Nationals of other States on
February 6, 1993, it has aeeepted ICSID jurisdietion from partly and
eonditionally to eompletely and unconditionally. In Professor Chen
An's words, the 'four great safeguards' have been dismanlled. that is,
(1) abandoning the right to eonsent case by case, (2) the right to local
remedies with priority, (3) the right to apply the host state's laws with
priority, and (4) the right to invoke the exception for material security.
Firstly. ICSID jurisdietion is expanding. Aeeording to my statistics,
from September 30, 1992 to June 17, 1999, 31 out of 92 BITS did not
aeeept ICSID jurisdiction, 15 out of 92 accepted ICSID jurisdietion,
"'^but only after several months' negotiation before resorting to ICSID
and only on the amount of compensation resulting from nationalization
and expropriation. For other disputes, the remedies trom the competent
eourt of the Contracting Party accepting the investment with priority- to
ICSID arbitration or under the eondition of altemative, ICSID
arbitration must be agreed to by the two parties. A typical example is
Artiele 9 of the Agreement between the People's Republic of China and
the Federal Republic of Germany on the Encouragement and
Reciprocal Protection of Investments"* :
(I) Any dispute between an investor of one Contracting
Party and the other Contracting Party in connection wilh an
investment in the territory of the other Contracting Party
"See China Bilateral Investment Treaties (2007) Investment Instruments
Online <http://www.Linctadxi.org/templates/DocSearch.aspx?id=779> at I
May 2007.
^'* For example, China has revised BITs with the Russian Federation. It is
going to revise its BIT with the Republic of Korea. China concluded a new
BIT wilh India.
''' See Chen An, 'Four Great Safeguards in Bilateral Investment Agreements
Shouldn't Be Rashly Dismanlled During Sino-Foreign Negotiation-Comments
on Critical Provi.sions Concerning Dispute Seulement in the U.S. and Canada's
Model BITs Text' (2006) 13 Chinese Journal of International Economic Law
3.
"" The other parties are Republic of Korea, Lithuania, Chile. Iceland. Peru.
Morocco. Israel. Yugoslavia, Saudi Arabia, Gabon. Cameroon, Macedonia,
TFYR, Yemen, Barbados, Bahrain and Qatar.
^'' China Bilateral Investment Treaties (2007) Investment Instruments Online
<http://www.unctad.org/seclions/dite/iia/docs/bits/china_germany.pdf> at May
1,2007.
246 llun Xiuli
shall, as far as possible, be settled amicably through
negotiations between the parties to the dispute.
(2) If the dispute cannot be settled through negotiations
within six months, either party to the dispute shall be entitled
to submit the dispute lo the competent court of the
Contracting Party accepting the investment.
(3) If a dispute involving the amount of compensation for
expropriation cannot be settled within six months after resort
to negotiations as specified in Paragraph I of this Article, it
may be submitted at the request of either party to an
international arbitration of the Intemational Centre for the
Settlement of Investment Disputes (ICSID), created by the
Convention on the Settlement of Investment Disputes
between States and Nationals of Other States, opened for
signature at Washington on March 18, 1965.
From June 17. 1999 to May 15, 2007, China signed 26 BITs, and only 7
did not accept ICSID jurisdiction. 18 agreements accepted ICSID
jurisdiction across the board^**. All of these 18 BITS have provisions
stating that any dispute arising out of an investment between one
Contracting Party and an investor of the other Contracting Party,
whenever possible, should be settled amicably between the two parties
concerned, and at the choice of the investor, be submitted to ICSID
arbitration. This means that ICSID is more likely to hear the case,
whieh also means that China, as a host state, will lose more regulatory
sovereignty. These provisions abandon rights to local remedies with
priority, and expand ICSID jurisdietion. In other words, an investor can
refer a dispute to ICSID for arbitration without using the administrative
and judicial remedies of the host state in advance if a dispute arises and
eertain consulting periods and administrative reconsideration periods
have passed. "^''The most representative elause is article 9 of the
Agreement between the Government of the Republie of Finland and
The Govemment of the People's Republie of China on the
Eneouragement and Reciprocal Protection of Investments, whieh
provides as follows:
1. Any dispute arising out of an investment between one
Contracting Party and an investor of the other Contracting
^^ The other parties are Congo. Botswana, Cyprus, Sierra Leone, Mozambique,
Kenya, Netherlands, Myanmar, Bosnia and Herzegovina, Trinidad and Tobago,
Côte d' Ivoire, Guyana, Germany, Benin, Latvia, Uganda. Russia and the
Seychelles.
"^ See Wang Hailang, 'Falling Behind or Going Far Beyond The Limit? —
China's Consent to the Jurisdiction of ICSID' (2006) 13 Chinese Journal of
International Economic Law 6.
Application of the Principle of Proportionality in ICSIt) Arbitration 247
Party should, whenever possible, be settled amicably
between the two parties concerned.
2. If the dispute has not been settled within three (3) months,
from the date at which it was raised in writing, the dispute
may, at the choice of the investor, be submitted;
(a) to the competent courts of the Contracting Party in whose
territory the investment is made; or
(b) to arbitration by the International Centre for the
Settlement of Investment Disputes (ICSID), established by
the Convention on the Settlement of Investment Disputes
between States and Nationals of other States, opened for
signature at Washington on 18 March '^^
Article 10 of BIT between China and tbe Netherlands is another typical
format:
1. Disputes which might arise between one of the
Contracting Parties and an investor of the other Contracting
Party concerning an investment of that investor in the
territory of the former Contracting Parly shall, whenever
possible, be settled amicably between the Parties concerned.
2. An investor may decide to submit a dispute to a competent
domestic court. In case a legal dispute conceming an
investment in the territory of the People's Republic of China
has been submitted to a competent domestic court, this
dispute may be submitted to intemational dispute settlement,
on the condition that the investor concerned has withdrawn
its case from the domestic court. If a dispute concerns an
investment in the territory of the Kingdom of the
Netherlands an investor may choose to submit a dispute to
international dispute settlement at any time.
3. If the dispute has not been settled amicably within a
period of six months, from the date either party to the dispute
requested amicable settlement, each Contracting Party gives
its unconditional consent to submit the dispute at the request
of the investor concerned to:
a) ICSID...^'
Bilateral Investment Treaties (2007) Investment Instruments Online
<www.unctadxi.org/templates/DocSearch.aspx?id=779> at May 14, 2007.
"" China Bilateral Investment Treaties (2007) Investment Instruments Online
<www.unctad.org/sections/dite/iia/docs/bits/china netherlands.pdf> at May
14,2007.
248 ¡km XniU
In addition, nearly all MFN clauses in China BITs state that: '[t]he
treatment and protection shall not be less favourable than that aeeorded
to investment and activities associated with such investments of
investors of a third State.' They do not exelude their applieability in
dispute settlement jurisdiction expressly, and thus give the investor a
chanee to elaim expanding ICSID jurisdiction through the MFN clause.
In most BITs concluded by China, general exeeption and essential
security exception elauses are not included. However, the United
States, Canada, India and USD models all pay more attention to
withholding rights to invoke the exception for general and essential
seeurity. Aeeording to Annex B.4 of the US Model BIT, the seeond
situation addressed by Artiele 6(1) [Expropriation and Compensation]
is indireet expropriation:
(a) The determination of whether an action or series of
actions by a Party, in a specific fact situation, constitutes an
indirect expropriation, requires a case-by case, fact-based
inquiry that considers, among other factors:
(i) the economic impact of the government action, although
the fact that an action or series of actions by a Party has an
adverse effect on the economic value of an investment,
standing alone, does not estabUsh that an indirect
expropriation has occurred;
(ii) the extent to which the government action interferes with
distinct, reasonable investment-backed expectations; and
(iii) the character of the government action.
(b) Except in rare circumstances, non-discriminatory
regulatory actions by a Party that are designed and applied to
protect legitimate public welfare objectives, such as public
health, safety and the environment, do not constitute indirect
expropriations. "
In addition, artiele 18 of the US Model BIT defines 'essential security'
as:
Nothing in this Treaty shall be construed:
1. to require a Party to furnish or allow access to any
information the disclosure of which it detemiines to be
contrary to its essential security interests; or 2. to preclude a
Party from applying measures that it considers necessary for
the fulfilment of its obligations with respect to the
^' Treaty between the Government of the United States of Ameriea and the
Govetntnent of [Country] Concerning the Encouragetnent and Reciprocal
Protection of Investment Model BIT (2004) Investment Treaty Arbitration
<http://ita.law.uvic.ca/documents/USmodeIbitnov04.pdf> at 17 May 2007.
.Application of the Principle ufFroportionality in ICSID Arbitration 249
maintenance or restoration of intemational peace or security,
or the protection of its own essential security interests.
Sections (b) and (c) of Annex B.13(l) of Canada's Model BIT have a
similar stipulation."''Aecording to article 12 of the Itidia Model BIT,
'nothing in the Agreement precludes the host Contraeting Party from
taking action for the proteetion of its essential security interests or in
circumstances of extreme emergency in aeeordanee with its laws
nomially and reasonably applied on a non diseriminatory basis.' " In
part 10 of the IiSD Model, national seeurity, taxation measures, general
reservations and exceptions are stipulated as general exeeptions, and
are 'a safety valve'.
Secondly, there is a trend to emphasise the application of BIT,
international law, and conflict of law. For example, typical clauses,
such as article 9.5 of BIT between Finland and China, stipulate that a
tribunal shall adjudieate in aceordance with the provisions of the
Agreement, the law of the Contracting Party involved in the dispute
(ineluding the rules on the eonñict of laws) and the rules of
intemational law applieable to both Contraeting Parties. In addition, the
fair and equitable elause is generally ineluded in recent BITs eoncluded
by China and foreign countries.**^ For example, the fair and equitable
prineiple is involved in article 3 of the agreetnent between China and
Finland. Investments by the investors of each Contraeting Party shall at
all times be accorded fair and equitable treatment in the territory of the
other Contracting Party. But there is no fair and equitable treatment in
the BIT between China and Bahrain.
'' Ibid.
•'•^ See Agreement between Canada and fCountryJ For The Protnotion and
Protection of Investments Model BIT (2004) Investment Treaty Arbitration
<http://ita.law.uvic.ca/documents/Canadian2004-FlPA-model-en.pdtV at 17
May 2007.
^^ See Agreement between the Government of the Republic of India and the
Governtnent of the Republic of fCountiy] for the Ptomotion and Protection of
Investments. Indian Model Text of BIPA (2003) Investment Treaty Arbitration
<http://ita.law.uvic.ca/Indiamodelbit.htm> at 17 May 2007.
•"' IISD Model International Agreement on Investment for Sustainable
DeveloptnetU (2005)
<http://ita.law.uvic.ca/documents/investment inodel_int_agreement.pdf> at 17
May 2007.
^^ See Yao Meizhen (ed). Comparative Foreign Investment Law (1993) 293;
Chen An (ed). International Investtnent Law (1999) 440. BITs añer 1999
increasingly strengthen the fair and equitable clause.
250 Han Xiiiti
In light of all of these, the understanding and support of ICSID, its
applieation of the fair and equitable prineiple, whieh includes the
pritieiple of proportionality, will significantly impact on investment
disputes relating to Chitia.
V. PROPOSALS TO THE CHINESE GOVERNMENT
A. Paying Attention to Stipulating Clause of Jurisdiction
on Investor -State Dispute Settlement by
Distinguishing Different Instance
Jurisdietion ties up with applieable law in investment disputes. If China
aeeepts ICSID jurisdiction without any reservations, it means China
will be confronted with international law ineluding the principle of
proportionality, instead of only its municipal law. Therefore, ICSID
jurisdiction is the sixty-four-dollar question. This paper argues that, in
future BITs, China should accept ICSID jurisdietion to different extents
aecording to different Contracting Parties, The following two graphs
show the top 15 countries or regions in investment stock outward and
inward to China in 2005; ""^they reflect China's investment trend as a
whole.
""* Worked out according to data from Ministry of Commerce of the People's
Republic of China, Statistical Bulletin of China s Outvtard Foreign Direct
Investment (2005)
<http://hzs.mofcom.gov.cn/accessory/200609/1157678204262.pdf> at 18 May
2007. Data also from Ministry of Commerce of the People's Republic of China,
Foreign Direct Investtnent Inward China (2005)
<http://www.fdi.gov.cn/pub/FDl/wztj/lntjsj/wstzsj/2005nzgwztj/t20060906_61
358.htm>at 18 May 2007.
Application of the Pritieiple of Proportionality in ICSID Arbitration 251
Top 15 Countries ana Regtonsol China's Outward Foreign Direct Invesimam bylhe and of 2005
(unit 3 hundred million ikillars)
Top 15 Countnes and Regions ot Foreign Diracl inves
(unit a hundred million
Imenl Inwarö China by Ihe end of 2005
dollars)
As seen from the graphs above, China is still an input eountry; therefore
it should not aeeept ICSID jurisdietion aeross the board. China should
reduee ICSID jurisdietion when it is the input eountry of direct
investment, and enlarge ICSID jurisdiction if it is the output country of
direct investment. In the fomier case, China should reserve more
jurisdietional sovereignty to itself For example, Japan, the Netherlands,
and England all are major investing eountries of China. For them,
China should limit ICSID jurisdietion in BITs. In the latter ease, China
should strengthen ICSID jurisdietion to protect investment abroad in
eountries where investor rights are not already protected through
existing agreements. As core benefits, BITs should give Chinese
252 Han Xiuli
investors the right to submit an investment dispute with the government
of the other party to international arbitration and with no requirement of
resorting to that country's domestie eourts. Therefore, to some countries
such as Congo, Botswana, Cyprus, Sierra Leone, Mozambique, Kenya,
Myanmar, Bosnia and Herzegovina, Trinidad and Tobago, Côte d'
Ivoire, Guyana, Benin, Latvia, Uganda, Russia and Seychelles, it is
right to enlarge ICSID jurisdiction.
With regard to this, China can lcam from the practiee of Korea.
According to the Korea-Chile Free Trade Agreement, settlement of a
dispute between a party and investor of the other party should first
attempt to be solved through consultation or negotiation.
Provided that six months have elapsed since the events
giving rise to a claim, a disputing investor may submit the
claim to arbitration under; (a) the ICSID Convention,
provided that both the disputing Party and the Parly of the
investor are parties to the Convention; (b) the Additional
Facility Rules of ICSID. provided that either the disputing
Party or the Party of the investor, but not both, is a party to
the ICSID Convention; or (c) the UNCITRAL Arbitration
But during Korea US Free Trade Agreement negotiation, Korea did not
agree with an investor-State dispute settlement clause like that in
Korea-Chile FTA. ^** When the Korea-US FTA negotiation was
concluded on April 2, 2007, Korea had to aeeept an Investor-State
Dispute Settlement clause. It should be noted that Korea exeluded
ICSID jurisdiction over investment disputes caused by publie reasons
sueh as health, safety, environment, real estate and tax policy, '''in my
opinion, the reason is that Korea has more investments in Chile, but the
US has more investments in Korea. Therefore, Korea does not want to
give investment money from the US a 'sanctified' status, and does not
mean to maximise investors' interests by limitless procedures of dispute
settlement. It sueeessfully keeps the so-ealled 'barriers to investment'
sueh as publie interest. China's govemtnent should also elassify the
other parties of BITs by investment trend and amount, and eonelude
"*' Free Trade Agreement between the Government of the Republic of Korea
and the Government of the Republic of Chile, concluded on 15 February 2003
and entered into force on 1 April 2004, Article 10.24 (Submission of a Claim
to Arbitration) <http://www.mofat.go.kr/index.html> at October 6. 2007.
^^ Free Trade Agreement between the Republic of Korea and the United States
of America, June 30, 2007 [Annex 11 -B]
< http://www.mofat.go.kr/index.html> at August 7, 2007.
"ibid.
Application of the Principle of Proportionality in ICSID Arbitration 253
BITs containing different investor-host state dispute settlement elauses
with different countries.
Although it is not clear if a MFN clause can be invoked in the
procedure, the jurisprudence of ICSID arbitration seems to be more
inclined to recognise its applicability in procedure. In several cases,
decisions on jurisdiction accepted the investor's claim invoking, by
way of a most-favoured-nation (MFN) clause in the BIT of the parent
country -host state, the provisions eonccrning dispute settlement
procedures of a bilateral investment treaty between the host state and a
third country.^^' In order to prevent some investors from free riding by
invoking the MFN clause in a BIT, claiming more favourable treatment
in dispute settlement procedures and enlarging ICSID jurisdiction, it is
necessary to exelude or expressly limit the application of MFN elauses
in dispute settlement procedures.
Finally, it is not necessary to abandon the right to invoke the exception
for material security. The Chinese government only needs to realize
that if exceptional measures for material security confonn to the
necessity requirement as eonsidered by the host state, they ean be legal.
This clause is very important for protecting substantial national
interests.
B. Paying More Attention to the Application of the Principle of
Proportionality through Other Channels
In faet, with the development of capital output, Chinese investors are
likely to be involved in disputes with foreign govemments. Thereiore,
the proportionality principle has more opportunities to be applied, in
intemational or national law, in cases where the host state reserves the
right to loeal remedies with priority and ICSID must first apply the host
state law in arbitration. The above survey shows that in most BITs
China has eoneluded, the arbitral award would be based on the law of
" See, eg, Emilio Agustín Mqffezini v Kingdom of Spain. ICSID Case No.
ARB/97/7 Decision on Objections to Jurisdiction of Januarys 25. 2000: Salini
Construttori S.p.A. and Italstrade S.p.A v the Hashetnite Kingdom of Jordan.
Case No. ARB/02/I3. Decision of the Tribunal on Jurisdiction of November
29, 2004; Siemens A.G. v Argentine Republic (Case No. ARB/02/8). Decision
on Jurisdiction of August 3. 2004: Suez. Sociedad General de Aguas de
Barcelona S.A.. and Vivendi Universal S.A. v. The Atgentitie Republic. ¡CSID
Case No. ARB/03/I9, Decision on Jurisdiction, August S. 2006, Investment
Treaty Arbitration <hUp://ita.law.uvic.ca/chronologicaÍ_list.htni> at May 18
2007.
254 Han Xiiili
the Party to the dispute including its mies on the eonflict of laws, the
provisions of the Agreement and universally accepted principles of
international law. Accordingly, conflict of laws may lead to the
applicability of other rules, ineluding the principle of proportionality.
For example, if the host state is a member of the EU, then the prineiple
of proportionality is a fundamental principle of its law. This is also the
ease in some other non-EU countries. As discussed above, in Siemens
A. G. V Argentina, Siemens argued that the State's authority to modify
the contract was limited by the proportionality principle in Article 28 of
the Argentine Constitution.''"'Argentina explained that the Argentine
Constitution reeognised the property right and the right of the State to
regulate it, provided it is done by law and subject to principles of
reasonableness and equality. As further explained by Argentina, these
prineiples meant that restrictions on individual rights must be warranted
by the facts and meet a soeial neeessity or convenience standard and the
limitation must be in line with the ends sought. ^'^
C. Strengthening Legality of Its Own Regulating Investment Measure
As yet, there have been no ICSID cases involving China, but the trend
of universal aeceptanee of ICSID jurisdiction and the application of
intemational law and the fair and equitable principle, regarded as
including the prineiple of proportionality, toll the alarm bell for the
Chinese govemmenr^\
It is neeessary to point out that the concept of the proportionality
principle is absent in Chinese administrative law and Constitution,
although the prineiple ean be found in Chinese traditional eulture, in the
philosophy of all things in moderation (the Ancient Greek maxim of;
pan metron aristón). China still lacks uniform administrative legislation
and also has no proportionality prineiple clause in it. Chinese scholars
disagree about the main principle in Chinese administrative law.
Scholars have different arguments, but few include the principle of
proportionality. One scholar thinks that the fundamental principle of
Chinese administrative law includes the principle of legitimacy and the
" Siemens A.G. v Argentine Republic ICS/D Case No. ARB/02/8 Award (2007)
[| 155] <http://ita.law.uvic.ca/documents/Siemens-Argentina-Award.pdf> at
May 18 2002.
^•' Ibid T174.
^^Although Professor Chen An stresses that in Sino-foreign investment
agreements, it is not suitable to abandon the 'Four Great Safeguards' however
this has become a reality in most cases.
Application of the Principle of Proportionality in ¡CSID Arbitration 255
principle of reasotiabletiess.^'^Another famous scholar thitiks it includes
the principles of rule of adtninistrative law, administrative impartiality,
openness, and efficiency. ^^ Still another thinks it itieludes safeguarding
the rights and frecdoins of people, the principle of administration by
law, and the principle of administrative benefit. ^'^ The principle of
proportionality has never been regarded as the eonstitutional prineiple
of China. Thus the administrative measures adopted by the Chinese
government tend to be reversed aecording to the prineiple of
proportionality.
in faet, some disputes in this respeet have oceurred. For example, a
dispute over an electric power contract between Coastal Corporation
and the Chinese loeal government^''. The parties in this case were the
investor—Coastal Corporation, and the government authorities of
Jiangsu Province. The investor entered into four joint ventures with
local authorities in 1995-1996 based on a scries of agreements with
local authorities to construct three peaking power plants in the Jiangsu
Provinee. The most important of these agreements were the power
purchase contracts setting the rate at whieh power would be produced
by the joint venture plants. The power purchase contraets were signed
with loeal entities, semi-autonomous municipal and provincial bodies
under the jurisdiction of local authorities when the power purchase
contracts were concluded. Between November 17, 1998 and September
22, 1999, in response to a Chinese measure examining power policies at
the national level, the Jiangsu Province promulgated a Comprehensive
Tariff Poliey that entered into effect as of July 15, 1999. The
comprehensive Tariff Poliey redueed rates across the board and
divested loeal authorities of the right to purchase electricity, and
pursuant to Notiee No. 249 of March 5. 1999, issued in conjunction
with the Comprehensive Tariff Policy, peaking power plants in Jiangsu
were required to enter into new power purehase contraets with the
Jiangsu Provineial Power Company, which was accorded a monopoly
in the purchase of electricity from power plants and in power
distribution to retail customers in the Provinee. In fact, the existing
power purehase contraets and their eost plus approach previously
^'' See Zhang Zheng Zhao (ed). Administrative Law and Administrative
Procedure Law (\999) 24-28.
^^ See Jiang Mingan (ed). Administrative Law and Administrative Procedure
¿i/ir (1999) 43-54.
^** See Fang Shirong (ed), Adtninistrative Law and Administrative Procedure
¿an (1999)48-60.
^•^ See Lorin S. Weisenfeld. 'MIGA After Fifteen Years' (2004) 9 Chine.w
Journal of Intet national Economic Law 169-173.
256 ¡Ian Xiuli
entered into with munieipal authorities were unilaterally abrogated. The
dispute was mediated by the Multi-lateral Investment Guarantee
Agency (MIGA) in the end.
In 1992, the Industrial Groups of the United States registered in the
British Cayman Islands in the Caribbean and situated in Los Angeles
wanted to cooperate with the People's Park of Shanghai to establish a
pleasure projeet called 'World Baileyuan'. In order to invest in this
project, the group set up Shanghai Baileyuan Pleasure Ltd., whose
board ehainnan, Shihao is the grandson of lineal deseent from Shi
Liangeai,^"the boss of Shen Bao (Shanghai Daily). Industrial Groups'
investment amounted to 43.5 million dollars, and the investment of
People's Park of Shanghai was thirty-years land-use right for 150
thousand square meters. The Shanghai Govemment approved the
project and enormous funds were invested. But in December of 1994,
Shanghai Foreign Investment Commission announced that the 'World
Baileyuan' project must be moved because the People's Park was fixed
as the center of city planning. In June of 1996, the Shanghai Huangpu
District Foreign Economic Commission promulgated the order that it
agreed the project to be eontinued in the People's Park, and project was
built again. But two years later, the Shanghai govemment Offiee
Department issued another document that changed the address of
'World Baileyuan' again, and this lead to the project mnning aground.
At this point, the input of the Industry Group had reached 2.7 million
dollars. The investor's petition for administrative reconsideration was
rejeeted. and administrative litigation lodged subsequently also ended
without any result, and the foreign investor was going to resort to
ICSID. For unknown reasons, the case was not brought to ICSID.
Huijin China Limited invested 2.7 hundred million yuan to establish a
cooperation company with Changehun Drainage Company. The
cooperation company managed a sewage disposal factory that could
deal with 390 thousand tons of sewage each day in the Changchun City
of China. The Changchun Govemment issued a Managing and
Administering Regulation on sewage disposal in Changehun Huijin.
But due to the administration system and inefficient organ eoneemed,
the Govemment did not perform its promise, and on February 28, 2003,
**" Investment by the grandson of lineal descent from Shi Liancai and
Convention on the Settlement of Investment Disputes between States and
Nationals of Other States^ Southern Weekly (Guangzhou. China). 25
November 2004.
Application of the Principle of Proportionality in ICSID Arbitration 257
the Changchun Govemment abolished the above regulation.'^' Finally,
after Huijin China Limited lost the lawsuit, the Changchun Govemment
repurchased the Huijin Sewage project under the provisions of the two
parties' agreement in order to settle the dispute between the
govemment and the foreign investor.
There are other eases were the govemments did not fulfill their
promises and obligations in a bona fide manner. Even though the
Chinese govemment or courts have not called these incidents
"expropriation', this is what they are. In conclusion, the actions of the
Chinese government should be regulated by itself in order to create a
good investment environment, above all, the actions should not be
forced by foreign forces such as ICSID decisions. With the trend of
internationalizing of investor-host state dispute settlement, the Chinese
government must realize the effects and challenges brought by
intemational jurisdiction and the application of intemational law to its
regulatory power to foreign investment and use the public resources.
VI. CONCLUSION
Relying on the principle of proportionality may encourage ICSÍD to
review the legitimacy of public policy and the appropriateness of
investment measures pursued by a state. The development of review
from a superficial level to a deep level restricts national regulatory
power. Compared with the non-discrimination treatment principle, the
proportionality principle is flexible, which beyond question, will
increase the power of the arbitral agency, and lead to unccnainty.
Accordingly, the Chinese government should pay more attention to
bilateral investment treaty clauses on ICSID jurisdiction to reduce the
possibility of applying the prineiple of proportionality, and also caiTy
out regulatory investment measures to confomi to the principle of
proportionality. The Chinese government must be able to promote
legitimate objectives, the means adopted must be the least restrictive to
the interest of the foreign investors compared to other feasible means,
and the means must be proportionate to the ends.
*•' Also see Liu Wenguo, Three Bottlenecks Musi Be Broken through for
Reducing Discharge of the Urban Sewage, Economic Information Dailyi
Beijing, China) 26 September 2007.
" 'Chang Chun Govemment buying back by Agreement Huijin Sewage
Project, and Legal Dispute Concluded'. (2005) 113 ¡nfortnation on the Water
Industry in China (Beijing, China)..
258 ¡hin Xiul,
Even though the status and function of the principle of proportionality
in intemational !aw has not been recognised universally, it should
arouse the attention of the Chinese government. Chinese government
praetiee regulating foreign investment is 'one size fits all'. Often the
bureaueratic phenomenon takes over, the administrative procedure is
very simple, and it laeks legislative authority and transparency. *'
Therefore, government authorities in the future might face frequent
complaints from investors. Moreover, aecording to the principle of
proportionality, administrative action without exercising discretion in
good faith dooms it to failure. Therefore, the practical sector of the
Chinese government should advanec its level of regulatory measures.
An expropriating measure that interferes foreign investment, must be
based on the application of duly adopted laws, considering the publie
interest, not discriminating against foreigners, providing compensation,
^ above all, it must still be proportionate to the public interest now.
Professor Walde has argued that the investment arbitration disciplines
are an instrument of 'tough love' to help transition countries, i.e., quite
underdeveloped in terms of governance quality, to upgrade governance.
''"^Although I do not think this is love to such countries but to investors,
China must face the reality of strengthening restrictions against such
countries' governanee. At last, I want to point out that as far as Chinese
Administrative Procedure Law is concerned, the eoncrete
administrative acts done by the administrative body can be challenged,
but the abstraet administrative acts can not be the object of the
Administrative Litigation. However, an intemational forum, such as
ICSID, the concrete and abstract administrative acts cannot not be
differentiated.
According lu Vandevelde., developing host states have retained considerable
discretion to employ interventionist tactics associated with nationalist and
Marxist economics in the BITS. The problem for the developing state,
however, is that it may not exercise its discretion well. Political pressure,
corruption or administrative ineptitude may cause the host state to take illiberal
action in the name of economic development that diminishes the welfare of the
state as a whole or that only aggravates existing inequalities. This is a
ubiquitous problem in developing countries. See Kenneth J. Vandevelde, 'The
Political Economy of a Bilateral Investment Treaty' (1998) 92 American
Journal of International Law 636.
See Robert Jennings and Arthur Watts, Oppenheim's International Law,
(1992)920.
''^ Thomas W. Walde, 'Investment Arbitration under the Energy Charter
Treaty: An Overview of Selected Key Issues Based on Recent Litigation
Experience' in Norbert Horn (ed). Arbitration Foreign Investment Dispute,
Kluwer Law International (2004) 193-235, 208.