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Two years after the signing of the Economic Cooperation Framework Agreement ("ECFA"), the Straits Exchange Foundation (SEF) and the Association for Relations Across the Taiwan Straits (ARATS) held the 8th Chiang-Chen Talks and signed the Cross-Strait Cooperation Agreement on Protection and Promotion of Investments ("Cross-Strait Investment Agreement") on 9 August 2012. The signing of the Cross-Strait Investment Agreement signifies that Taiwan and China have moved beyond unilateral enactment and administration of investment protection laws to jointly establish investment protection measures agreeable to both sides. The Cross-Strait Investment Agreement's conciliation mechanisms enhance protection and promotion of Taiwanese and Chinese investments. For Taiwanese companies that intend to invest or are investing in China, their investments would benefit greatly from a solid understanding of the terms of the Cross-Strait Investment Agreement.
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The Cross-Strait Investment Agreement is by nature a bilateral investment agreement ("BIA") in that two countries or governments agree to protect investments from the other party in order to minimize investment risks, e.g., change of government, currency risk, operating risk, source of capital, foreign exchange control, expropriation, nationalization, confiscation, war, rebellion, and riot. Through joint efforts of Taiwan and China, the main objective of the Cross-Strait Investment Agreement is to provide legitimate and adequate protection of personal safety, assets and profits for investors in order to stimulate further investment and economic benefits.
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The key terms of the Cross-Strait Investment Agreement are as follows:
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| 1. |
The definition of investment
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The Cross-Strait Investment Agreement defines "investment" broadly, which includes real property, personal property, rights derived from contracts, license rights, guarantees of any kind, debenture bonds and loans, and revenues and expected revenues from investment. Basically, all investment activities by Taiwanese companies should fall under this definition.
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| 2. |
The definition of investor
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Likewise, the Cross-Strait Investment Agreement defines "investor" comprehensively, which includes individuals, enterprises, companies, trusts, outlets, partnerships, and any entities owned or controlled by an investor. Most importantly, Taiwanese companies that invest in China via an entity situated in a jurisdiction other than China or Taiwan are also covered under the definition, thus are protected by the Cross-Strait Investment Agreement.
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| 3. |
The applicability of the Cross-Strait Investment Agreement
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The Cross-Strait Investment Agreement is applicable to the central and local government agencies, as well as the measures implemented or maintained by their authorization (exceptions are listed in the Cross-Strait Investment Agreement). The protection provided by the Cross-Strait Investment Agreement is retroactively applicable to investment disputes not yet resolved before the Cross-Strait Investment Agreement takes effect.
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| 4. |
Strict limitation of the government's right to expropriate
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The Cross-Strait Investment Agreement provides that without a legitimate purpose, due process and the required compensation, arbitrary or biased expropriation of investment revenues is not allowed. The definition of "expropriation" includes "direct expropriation" and "indirect expropriation." "Direct expropriation" refers to a clearly announced action by the government to seize an investment or revenue, while "indirect expropriation" refers to measures implemented by the government whose effects are equivalent to those of direct expropriation. Nonetheless, not every measure that has a negative economic influence on an investor constitutes expropriation; whether expropriation has been conducted should be judged by the level of bias and intervention, and its conformity to the principle of proportionality. In China, Taiwanese companies rarely encounter direct expropriation; indirect expropriation is more often the case. To require compensation for indirect expropriation in the Cross-Strait Investment Agreement is a significant provision to the investors.
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Although in principle tax is not an instance of expropriation, the Cross-Strait Investment Agreement provides that if the investor argues that a tax-related measure taken in the place of investment constitutes expropriation, the investor and the government agency should negotiate to reach an understanding on whether the measure constitutes expropriation. If both parties agree it does, the measure is expropriation even if it is named otherwise.
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| 5. |
Compensation for loss incurred from expropriation
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An important requisite of legitimate expropriation is government compensation. The Cross-Strait Investment Agreement explicitly provides that the compensation should be based on "fair market value at the time of expropriation," and interest should be paid "until the day of payment"; the interest should be calculated according to the reasonable commercial rate. The compensation should be paid forthwith and not be delayed; it should also be exchangeable to another currency, and the right of which should be freely transferrable.
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| 6. |
The freedom of currency exchange
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The Cross-Strait Investment Agreement requires that the investors' right to transfer their investments and revenues be protected, including the freedom to exchange their investments and revenues into other currencies.
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| 7. |
Dispute Resolution
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Under the Cross-Strait Investment Agreement, investment disputes are classified into disputes between two private parties (P to P), and disputes between a private party and a government agency (P to G); the Cross-Strait Investment Agreement provides ways to resolve the two types of disputes as follows:
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(1) |
P to G
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For disputes between a private party and a government agency, the Cross-Strait Investment Agreement prescribes five dispute resolution mechanisms: (1) negotiation between the disputing parties; (2) coordination via local dispute settlement authorities; (3) conciliation with the assistance of the investment division of the Cross-Strait Economic Cooperation Committee; (4) mediation via the cross-strait dispute resolution institution following the mediation procedures for investment compensation disputes provided in the Annex to the IPA; and (5) administrative remedies or judicial proceedings. If investors have already filed an administrative appeal or litigation, they cannot submit the same dispute to the cross-strait dispute resolution institution for mediation.
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There are high expectations for mediation through a designated institute. For example, if the investment of a Taiwanese company is expropriated and the compensation is in dispute, the Taiwanese company can request the institute to conduct a mediation proceeding as prescribed in the Cross-Strait Investment Agreement. The Cross-Strait Investment Agreement also requires that every six months the cross-strait dispute resolution institution report to the Cross-Strait Economic Cooperation Committee how disputes have been managed; this report mechanism is expected to deter the local governments, especially those of China, from illegal intervention.
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(2) |
P to P
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The Cross-Strait Investment Agreement provides that disputes between two private parties can be submitted to arbitration either by an arbitration clause in the contract or an agreement between the private parties after the dispute has arisen. The parties can designate the arbitration institute and the place of arbitration. For example, the parties can designate a Taiwanese arbitration institute such as the Chinese Arbitration Association, Taipei to conduct the arbitration proceeding in Dongguan. This is an unprecedented arrangement, which affords Taiwanese corporations a fairer and more efficient way to resolve their investment disputes with their Chinese counterparts.
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Arbitration is more efficient and specialized compared with litigation. When companies in Taiwan and China are about to sign a contract, the arbitration institute, place of arbitration, and the governing law (the law that governs the contractual relationship between the parties) should be prescribed. In particular, in order to ensure an efficient and legitimate proceeding, the parties should choose an arbitration institute that is well established and experienced in handling arbitration in jurisdictions outside Taiwan and China. In addition, enterprises should employ legal affairs personnel (those with attorney qualifications are preferred) to work with external lawyers in drafting, negotiating and executing contracts, so that the rights of the enterprise can be protected should a dispute arise.
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| 8. |
The protection of personal freedom is another key feature of the Cross-Strait Investment Agreement. Taiwan insisted that when an individual is deprived of his/her personal freedom, such person's family members or colleagues in China should be informed within 24 hours. Initially, China was reluctant to agree to such request because it was more favorable than the treatment extended to Chinese citizens in similar situations. However, China eventually made a concession and agreed that "one party shall, in accordance with its laws and regulations, inform local family members or associates of the other party's investor within 24 hours of deprivation of personal freedom" on the basis of both parties' "consensus on personal freedom and safety protection." If a Taiwanese investor is arrested or subjected to confined residency, China is obliged to inform such person's local family members or associates and the competent government agency designated by Taiwan under the Cross-Strait Agreements on Joint Crime-Fighting and Mutual Judicial Assistance.
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In light of the new investment climate created by the Cross-Strait Investment Agreement, we suggest that those who intend to invest in China retain qualified legal professionals to review the investment-related agreements, in which an arbitration clause should be included. If the other party resolutely opposes arbitration, the investor should reconsider the investment – arbitration is a common practice in international investment; thus, the other party's attitude toward the arbitration clause can be read as a barometer of its commitment to perform the contract. It is also a fair practice to, when arbitration has been agreed on, have one party decide the place of arbitration, and the other party appoint the arbitration institute. The arbitration clause usually states that the chief arbitrator should be a person from a jurisdiction outside Taiwan and China.
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Furthermore, with respect to dispute resolution between a private party and a government agency, Taiwanese companies should be aware of the following:
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| 1. |
In China, when a government official threatens to deprive the personal freedom of an investor, whether it be a restraining order, seizure, detention, or forcible expulsion, the Cross-Strait Investment Agreement requires the official to inform the investor's local family members or associates of the deprivation and remind them to use the mechanisms provided by the Cross-Strait Investment Agreement for protection.
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| 2. |
When facing extremely unreasonable and prejudicial taxes that are substantively equivalent to expropriation of physical objects (including real property, land, factory building, usufruct, and shareholding), an expert should be consulted and the mechanisms in the Cross-Strait Investment Agreement should be utilized, including the compensation dispute resolution mechanism.
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| 3. |
To the Chinese government, whether an instance of expropriation is legitimate and whether the amount of compensation is reasonable are deemed the same issue, although they are in fact two separate issues that should be addressed by different dispute resolution mechanisms. But there is no harm in adopting the mechanisms in the Cross-Strait Investment Agreement via the institutes designated by the parties to receive government approval to proceed with mediation. Since the ARATS and the SEF have yet to exchange their lists of investment dispute resolution institutes, the mediation mechanism remains sketchy before the Cross-Strait Investment Agreement comes into effect and will crystallize after each completes its necessary internal procedures and informs the other of the completion.
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| 4. |
The amount of compensation should be based on fair market value. To resolve disputes smoothly, Taiwanese companies should have a credible institute verify the amount against industry standards during the dispute resolution process.
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