A. A Strong Emphasis on the Principles of Equality, Mutual Benefit, and State Sovereignty

The China-Sri Lanka BIT gives emphasis to particular principles which were uncommon for investment treaties concluded during the 1980s. For example, regard for “equality” and “mutual benefit” was explicitly articulated in the Preamble, which begins with the conventional neoliberal idea common in almost all early BITs, that reciprocal encouragement, promotion, and protection of investments will be conducive to stimulating business activities and increasing prosperity in both states. One of the secondary clauses contained in the Preamble provides that the treaty has been concluded with the desire of creating favourable conditions for greater economic co-operation between China and Sri Lanka in general, and investments by nationals and companies of each party, in particular. This secondary clause specifically mentions the Contracting Parties’ desire to create favourable conditions for greater economic co-operation based on the principles of equality and mutual benefit. Conjoining equality with the concept of mutual benefit results in combining juridical and economic equality “making equality substantive rather than merely formal”.Footnote ⁴⁹ And thus, the principle of equality and mutual benefit included in the Preamble of the China-Sri Lanka BIT requires maintaining the balance of the rights and obligations of the State Parties to the treaty.Footnote ⁵⁰

In addition, the treaty contains some substantive provisions drafted with a greater emphasis on the principle of state sovereignty than was traditional for investment treaties concluded during the 1980s. The first example in this respect is the definition of the term “investment”, which provides for an “asset-based” definition of investment, accompanied by a non-exclusive list of covered investments.Footnote ⁵¹ The definition further stipulates the need to “permit investments by the host state in accordance with its laws and regulations”. As such, an investment that has been made in violation of any applicable law or regulation of the host state would not be protected under the China-Sri Lanka BIT due to its illegality.Footnote ⁵² The requirement of legality thus manifests that the China-Sri Lanka BIT is based on the principle of sovereignty as it obliges the host state to admit an investment by a foreign investor only if the investment in question is made in compliance with its laws and regulations.Footnote ⁵³

However, the requirement of “making investment in accordance with host state law”, the common specification with respect to the legality of investments, is not included in the China-Sri Lanka BIT.Footnote ⁵⁴ Instead, the treaty's definition of investment includes “an asset permitted by each contracting party in accordance with its laws and regulations”. The prima facie difference of the wording of these two phrases raises the question of whether the China-Sri Lanka BIT includes an exceptional specification which is different from the standard found in many other BITs. In the scholarship, however, the common specification has been identified as a liberal drafting pattern compared to the requirement of “permitting an asset by the host state in accordance with its laws and regulations”.Footnote ⁵⁵ It can be thus argued that the standard included in the China-Sri Lanka BIT is not substantively different from the common specification, yet it deliberately indicates the emphasis given to the principle of state sovereignty by employing strong wording which refuses the right of entry with respect to foreign investment.

The applicability of the China-Sri Lanka BIT has also been drafted with an emphasis on the principle of state sovereignty. The treaty's applicability is expressly limited only to investments that are approved in writing, upon any condition as such authorities deem suitable, by the competent Sri Lankan or Chinese authorities.Footnote ⁵⁶ Accordingly, other than being permitted according to the host state law, investments should be approved in writing by the relevant governmental authorities in order to become a protected investment under the China-Sri Lanka BIT. This prerequisite thus further safeguards the host state's right to screen foreign investments, and expressly withholds an absolute right of entry.Footnote ⁵⁷ The explicit permission given to the competent authorities to impose any condition as such authorities deem suitable particularly provides the host state with an enhanced policy space to regulate foreign investment at their entry, and in doing so maximizes state sovereignty.

As such, the promise given by the Contracting State Parties to encourage and create favourable conditions for investment for each other's nationals and companies, which are in line with the host state's general economic policy, becomes a provisional undertaking subject to the host state's right to screen foreign investments.Footnote ⁵⁸ At the same time, the requirement of written approval exists independently from the legality requirement of the investment.Footnote ⁵⁹ The host state thus has an additional jurisdictional objection, the successful assertion of which will exclude even lawful investments from the purview of the China-Sri Lanka BIT, on the basis that they have not been approved in writing by the host state's authorities. It shows the legal significance of the requirement of written approval in the context of the China-Sri Lanka BIT, leaving an essential imprint on the principle of state sovereignty.

The protection afforded against uncompensated expropriation is another provision which reveals the greater emphasis given to the principle of state sovereignty.Footnote ⁶⁰ It allows the host state to expropriate investments for, inter alia, “any purpose authorized by law” rather than a public purpose,Footnote ⁶¹ the latter of which is the generally used criterion for determining the legality of an expropriation under international law.Footnote ⁶² Public purpose has been further accepted in the investment treaty jurisprudence as a hallmark condition which prevents host states from taking foreign property for purely private benefits or an illicit end, but only for legitimate welfare objectives.Footnote ⁶³ This common criterion has been replaced in the China-Sri Lanka BIT with “any purpose authorized by law”, yet the treaty does not specify whether the term “law” refers to the domestic law of host state or to international law or both. However, through a holistic approach, it can be argued that the term “law” denotes the domestic law of the host state since the China-Sri Lanka BIT expressly articulates that all investments should be governed by the law in force in the host state.Footnote ⁶⁴

By allowing the host state to expropriate investments for “any purpose authorized by law”, the treaty explicitly asserts the legislative power of the host state. It ensures the host state's ability to enact laws at any time to declare any purpose as an authorized ground for expropriating foreign properties, perhaps including purposes which go beyond a conventional understanding of public purpose. As such, the China-Sri Lanka BIT accentuates the “fullness of legislative power” of the host state, which is an essential element of state sovereignty.Footnote ⁶⁵ Likewise, the treaty ensures the “fullness of judicial power” of the host state by vesting its domestic courts with the authority to review the legality of any measure of expropriation, at the request of the nationals and companies of the other Contracting Party.Footnote ⁶⁶ The China-Sri Lanka BIT thus prevents foreign investors from bypassing the national court system of the host state to resolve their investment disputes regarding the legality of an expropriation, safeguarding the supremacy of the national court system and thereby underscoring an important element of sovereignty in the form of judicial powers.

The dispute settlement clause of the China-Sri Lanka BIT provides another example in this respect as it requires investors to have recourse to the competent courts of the host state to resolve any investment disputes only after being unsuccessful in their attempts to resolve them through negotiations within six months.Footnote ⁶⁷ The provisions thus constitute an outright bar which precludes investors from bypassing the national court system of the host state regardless of whether or not local courts can deliver justice to aggrieved foreign investors. A dispute involving the amount of compensation resulting from expropriation, which cannot be settled with six months through negotiations, constitutes the only exception, as the treaty allows either the investor or host state to have recourse to international arbitration.Footnote ⁶⁸ Yet the foreign national or company concerned will lose this opportunity when they first initiate a case in the domestic courts to resolve the issue.Footnote ⁶⁹ Thus, the dispute settlement clause asserts the supremacy of the national court system of the host state in resolving investment disputes and thereby the principle of state sovereignty.

B. Deliberately De-emphasizing Private Business Activities whilst Indirectly Encompassing State-Owned Enterprises

Safeguarding private investors and their investments against a host state's interference was the fundamental purpose for which IIAs were concluded. The China-Sri Lanka BIT, however, does not refer to “private” business initiatives in the Preamble to the treaty or elsewhere. It thus indicates the treaty's deliberate attempt to de-emphasize the private nature of business activities from its ambit. Interestingly, though, the treaty is sketched out in a manner which would cover investments made by China's SOEs—the main vehicle through which China's outbound investments have been carried out, particularly in sectors such as infrastructure and natural resources. This is because the definition of the term “company” means a corporation incorporated or other juridical person constituted under either Sri Lankan law or Chinese law.Footnote ⁷⁰ This explanation necessarily raises the question as to what is meant by the “other juridical person” constituted under the respective domestic laws. Understandably, this term is included to cover Chinese SOEs because, by the time the China-Sri Lanka BIT was concluded, China did not have a modern corporate system governed by Company Law, as with Sri Lanka, but had a system that governed SOEs under Enterprise Law, which affords them with separate legal personality.Footnote ⁷¹

Undoubtedly, this is the reason why the China-Sri Lanka BIT defines Chinese companies as a company incorporated or other judicial person constituted under Chinese law, as the second category apparently covers China's SOEs which are not incorporated under a modern corporate system, but operate as separate legal persons. This inference, together with the fact that the China-Sri Lanka BIT does not specifically mention the protection of private investment, support the arguments for the treaty's availability to Chinese SOEs. In the modern context, this definition is certain enough to cover investments made by China's sovereign wealth fund [SWF], which has increased participation in international investments in recent years as one of the most dynamic SWFs in the world.Footnote ⁷² This is because China's SWF is incorporated under the Company Law of China under the name of China Investment Corporation [CIC], which has three incorporated subsidiaries under Chinese law.Footnote ⁷³ This results in bringing China's SWF under the purview of the China-Sri Lanka BIT, as companies incorporated under Chinese law have been identified as entities which can rely on the treaty.

C. Providing for Limited Substantive and Procedural Treaty Protection

One of the striking features of the China-Sri Lanka BIT is that it affords limited treaty protection for investments, either by omitting to provide them with certain treatment standards or by restricting their applicability. With respect to the first feature, the treaty does not provide for national treatment, one of the core investment disciplines generally included in IIAs. Omitting to provide certain investment standards is not unprecedented in investment treaty-making, yet the absence of national treatment in the China-Sri Lanka BIT prevents investors from asking the host state to treat their investments no less favourably than it would investments of its own nationals and companies. It is thus apparent that the treaty does not purport to place foreign and national investments in an equal position, allowing the host state to undermine the competitiveness between foreign and national investments perhaps in like circumstances. This has been expounded as the common approach in investment treaty-making in the early stages of BITs, as many states had large state-owned industries they sought to protect from foreign competition.Footnote ⁷⁴

With respect to the second feature, some of the treatment standards have been drafted in a restrictive manner. For example, the Most Favoured Nation [MFN] treatment clause stipulates that Contracting Parties will not treat investments covered by the China-Sri Lanka BIT less favourably than those of any third state, subject to Articles 5, 6, and 11 of the treaty.Footnote ⁷⁵ Article 5 articulates the typical exception to the MFN clause: regional integration and taxation. Yet the inclusion of two other Articles exhibits an uncommon drafting pattern by precluding the MFN clause from being invoked with respect to the protection against uncompensated expropriation, as well as regarding the non-precluded measures [NPM] provision. Excluding protection against uncompensated expropriation from the purview of the MFN clause is particularly significant in the context of the China-Sri Lanka BIT, because, as discussed, the treaty has been drafted in a manner which provides the host state with unconstrained authority over the legality of an event of expropriation.

Likewise, excluding the NPM provision from the purview of MFN raises concerns because, as will be discussed, the former provides the host state with enhanced room to deny the applicability of the treaty to certain state measures and actions based on the “national interest”, which is an extremely vague and highly policy-oriented term. In addition, the manner in which the absolute treatment standards have been drafted demonstrates the restrictiveness of the substantive protection accorded by the China-Sri Lanka BIT. For context, the treaty stipulates to provide approved investments with fair and equitable treatment [FET] “in accordance with the agreement”.Footnote ⁷⁶ On the face of it, this provision does not allow reviewing the host state's measures against the standards commonplace in investment treaties: customary international law, general principles of international law, or considering FET as an autonomous standard.Footnote ⁷⁷

Instead, the articulation that “in accordance with the agreement” leads to the conclusion that the China-Sri Lanka BIT considers the treaty per se as the standard of review, and thus violation of FET treatment can be established only in a situation where other treatment standards provided for in the treaty have been violated by the host states. In that sense, the China-Sri Lanka BIT provides for a relatively narrow basis to invoke treaty protection under the FET clause. As with the substantive treaty protection, the treaty affords limited procedural protection by allowing only disputes involving the amount of compensation resulting from expropriation, which cannot be settled within six months through negotiations, to be submitted to an international arbitral tribunal, unless the national or company concerned has not resorted to the competent court of the host state.Footnote ⁷⁸ As a consequence, the treaty provides for extremely limited access to international arbitration to resolve investment disputes, contrary to the predominant approach adopted in the BITs concluded in the 1980s.

D. Providing the Host State with Enhanced Regulatory Authority to Adopt Measures that Otherwise Violate its BIT Obligations

The China-Sri Lanka BIT contains a NPM clauseFootnote ⁷⁹ under the heading “prohibition and restriction clause”: a type of NPM provision diffused mostly among South-South BITs.Footnote ⁸⁰ This clause is supposed to function as a primary legal rule that restrains the substantive treaty protection in specific circumstances by removing some of the state measures from the applicability of the China-Sri Lanka BIT. This transfers the burden of damaging foreign investors from the host state to foreign investors without making the state liable to pay compensation for aggrieved foreign investors on the basis that disputed measures are essentially directed to achieve permissible objectives.Footnote ⁸¹ However, the permissible objectives contained in the NPM clause are broad enough to justify any kind of prohibitions or restrictions or any other action which is directed to the protection of national interests of the host state, or to the protection of public health, or to the prevention of diseases and pests in animals or plants. Explicitly providing for the host state's right to take any action, particularly in relation to the “national interest” has so far been an uncommon formulation in general investment treaty-making.Footnote ⁸²

This articulation, moreover, affords the host state potentially unconstrained regulatory space to act inconsistently with its BIT obligations, based on a highly policy-relevant term.Footnote ⁸³ This is because “national interests” is an extremely broad objective, or a nebulous concept, which has great flexibility to encompass any domestically determined policy objective,Footnote ⁸⁴ and thus is capable of being manipulated to cover a far broader category of government measures. It apparently provides the host state with enhanced regulatory authority to shield a range of measures taken not only for legitimate objectives such as national security, but also for illegitimate objectives such as disguised protectionism. This enhanced regulatory space is, moreover, fortified by employing a loose “nexus” requirement: “directed to” suggests that such measures are permitted if they are envisioned by the host state government to further legitimate ends stipulated as permissible objectives.Footnote ⁸⁵ The relatively lower threshold for establishing the means-end relationship between an impugned state measure and the permissible objective being pursued, together with the unambiguous and broad permissible objective “national interests”, essentially expands the breadth of the host state's regulatory flexibility to adopt measures that would otherwise violate its BIT obligations.

Moreover, the NPM clause does not make this regulatory flexibility contingent on conditions such as non-discrimination or reasonableness. As previously mentioned, the breadth of the regulatory space available for the host state under the China-Sri Lanka BIT matters, as the NPM clause is excluded from the application of the MFN clause.Footnote ⁸⁶ This exclusion apparently aims to prevent foreign investors from undermining the host state's regulatory authority safeguarded by the treaty, perhaps by importing relatively more favourable NPM clauses included in other BITs concluded by the respective host state, or pointing out BITs which do not contain NPM clauses at all.Footnote ⁸⁷ However, the China-Sri Lanka BIT does not include direct language to make the NPM clause self-judging, or the common formulation found in such clauses: “measures which the state party considers necessary.”Footnote ⁸⁸ It can thus be argued that the China-Sri Lanka BIT allows adjudicators to review an impugned measure and assess its need to achieve the objective being pursued by adopting measures inconsistent with BIT obligations.

Even so, through a holistic approach, the NPM clause could be read as an absolute bar to judicial or arbitral review of host state determination with respect to the permissible objectives, and thereby makes the clause self-judging in nature.Footnote ⁸⁹ This is because, as discussed, the China-Sri Lanka BIT is drafted with great deference to the principle of state sovereignty, and thus the treaty's context supports the view that State Parties intended to be the “sole judge” or “sole arbiter” of when the circumstances require measures or actions of the sort envisaged by the NPM provision.Footnote ⁹⁰ Unless its invocation is subject to good faith review, the apparent self-judging nature of the NPM provision increases the risk that this clause would be used by the host state as a blanket exception for regulatory measures, to the detriment of the protection of foreign investments, yet clearly offers host states enhanced policy space to regulate investments at the post-establishment phase, particularly during extraordinary circumstances.

A. The Ability to Determine the Liability for Expropriation in Claims Made under the Restrictive Dispute Settlement Clause

Determining the liability for expropriation in claims made under the restrictive dispute settlement is the first issue to be considered. Put differently, does an arbitral tribunal have jurisdiction to determine the occurrence of an expropriation when a claim is made based on a dispute settlement clause which articulates that only the amount of compensation payable in an event of expropriation can be arbitrated? Interestingly, this issue has been discussed in almost all claims by Chinese investors hitherto, and tribunals’ determinations are generally based on two considerations: whether the treaty contains a “fork-in-the-road” clause, and its impact on access to international arbitration.Footnote ¹⁰³ In the light of these two considerations, most of the tribunals adopted a broad approach towards restrictive dispute settlement clauses, allowing jurisdiction to determine not only the quantum of compensation but also the occurrence of an expropriation under the respective Chinese BITs on which the claims were brought.Footnote ¹⁰⁴

With respect to the first consideration, whether the treaty contains a “fork-in-the-road” clause, the China-Sri Lanka BIT could be read as containing a clause to that effect. This is because the treaty prevents concerned nationals and companies from having recourse to arbitration to resolve a dispute involving the amount of compensation payable in an expropriation when an investor has initiated proceedings before a competent domestic court.Footnote ¹⁰⁵ At the same time, the treaty stipulates that the competent courts of the host state have jurisdiction to decide the legality of any measures of expropriation; a process in which the issue of compensation will be addressed as it has been identified as one of the conditions of a legal expropriation.Footnote ¹⁰⁶ As a result, investors are restricted to the provisions of the treaty to determine the legality of a given expropriatory measure, whilst the issue of compensation has to be taken into account by the competent domestic court when determining the legality of an expropriatory measure. This scenario would prevent investors from attempting to arbitrate the amount of compensation when they have already had recourse to the competent domestic court to determine the legality of the impugned expropriatory measures, and thus satisfy the second consideration.Footnote ¹⁰⁷

Such an interpretation will lead to determining the existence of a “fork-in-the-road” clause in the China-Sri Lanka BIT and its adverse impact on access to international arbitration. This increases the possibility that the arbitral tribunal will have jurisdiction to decide not only the quantum of compensation but also the occurrence of an expropriation. The likelihood is furthered by the fact that the treaty includes the phrase “involving”, which has been interpreted by arbitral tribunals in a manner which includes issues associated with an expropriation, or in other words, as an inclusive, rather than exclusive, phrase.Footnote ¹⁰⁸ This inference, however, becomes somewhat problematic as some of the arbitral tribunals have reached the opposite conclusion. They have held that similarly worded dispute settlement clauses provide jurisdiction only to the quantum of compensation payable, but not to the occurrence of an expropriation.Footnote ¹⁰⁹ In particular, the Tribunal in the case of China Heilongjiang v. Mongolia adopted a narrow view of the restrictive dispute settlement clause, holding that the Tribunal did not have jurisdiction over the expropriation claims because the relevant BIT confined jurisdiction of an arbitral tribunal only to a dispute involving the amount of compensation resulting from an expropriation.Footnote ¹¹⁰ It is thus unclear whether investors can confidently argue for the jurisdiction of an arbitral tribunal established under the China-Sri Lanka BIT to determine the occurrence of an expropriation. The answer to this legal issue is entirely based on the interpretive approach that will be adopted by an adjudication forum regarding the restrictive dispute settlement clause.

B. The Applicability of the China-Sri Lanka BIT to China's Special Administrative Regions

The applicability of the China-Sri Lanka BIT to China's SARs is another legal issue left at the discretion of the adjudication forums which host the investment disputes under the China-Sri Lanka BIT.Footnote ¹¹¹ This has become extremely important in a context where Hong Kong is amongst the top sources of Sri Lanka's inbound investments.Footnote ¹¹² Furthermore, the fact that the luxury hotel destroyed by the recent terrorist attacks in Sri Lanka is an investment by a company based in Hong Kong has brought the physical protection of investments from China's SAR to the fore.Footnote ¹¹³ This issue further deserves considerable attention as there are no publicly known investment agreements concluded between Sri Lanka and China's SARs which were not part of the PRC territory in 1986 at the time the China-Sri Lanka BIT was signed.Footnote ¹¹⁴ At the same time, the application of Mainland China's BIT to Hong Kong and Macao has not been clearly determined by the Joint Declarations China signed with the UK in 1984 and with Macao in 1987 which, inter alia, accept the treaty-making powers of SARs.Footnote ¹¹⁵ As a consequence, territorial application of the China-Sri Lanka BIT will be an important and complex legal issue if the adjudication forum considers it as a necessary consideration for establishing its territorial jurisdiction.

According to investment treaty jurisprudence, it is important to consider whether the treaty has expressly excluded its application to SARs or otherwise established that the treaty is not applicable to China's whole territory.Footnote ¹¹⁶ With respect to the first consideration, the China-Sri Lanka BIT does not expressly exclude its application to SARs, yet stipulates its applicability to investments made “in the territory of PRC”.Footnote ¹¹⁷ Unless otherwise established, these factors provide for a sufficient legal basis to argue that the China-Sri Lanka BIT applies to the Hong Kong and Macao SARs which are considered as integral parts of the PRC's territory under the “one country two systems” policy. However, the applicability of the China-Sri Lanka BIT becomes more complicated with the stance adopted by China towards the applicability of Mainland BITs to its SARs in the wake of legal debate on the applicability of the China-Laos BIT to Macao triggered by the Sanum Investments Limited Arbitration. This is because China declared that, as a principle, the investment agreements between the central government and foreign countries do not apply to SARs, unless otherwise decided by the central government after seeking the views of the SAR governments and consulting with the other Contracting Parties of the agreement.Footnote ¹¹⁸

Consequently, it can be argued that, as a matter of principle, the China-Sri Lanka BIT is not applicable to Hong Kong and Macao, subject to the evidentiary weight of this official declaration, which remains to be assessed. However, the official declarations do not deny the applicability of mainland BITs to SARs in absolute terms, and thus a situation may arise in which the Beijing government, the Sri Lankan government, and China's SAR governments agree that the China-Sri Lanka BIT can apply to Hong Kong and Macao as well. Therefore, the applicability of the China-Sri Lanka BIT to China's SAR has become a political choice as well as a legal issue amongst respective governments. As with the issue of territorial jurisdiction, personal jurisdiction of an arbitral tribunal constituted under the China-Sri Lanka BIT—whether an investor from Hong Kong or Macao is a qualified investor under the treaty—is worthy of attention. At a glance, it is possible for certain natural persons of Hong Kong and Macao, as well as companies, to invoke treaty protection under the China-Sri Lanka BIT. This is because investors from Hong Kong and Macao who can prove their Chinese nationality under relevant Chinese law can rely on the China-Sri Lanka BIT to invoke treaty protection, as the treaty confirms its availability to investments made by Chinese nationals in the territory of Sri Lanka.Footnote ¹¹⁹

Likewise, companies and other juridical persons incorporated or constituted under relevant laws in Hong Kong and Macao and having their seats in the PRC's territory can apparently invoke treaty protection under the China-Sri Lanka BIT as the treaty affirms its applicability to investments made by such juridical persons in the territory of Sri Lanka.Footnote ¹²⁰ This inference is, however, subject to the application of the China-Sri Lanka BIT to SARs, because the absence of territorial jurisdiction will result in disqualifying legal entities registered in SARs as protected investors. This is because the Sanum Tribunal has made it clear that the applicability of the China-Laos BIT to Macao was the yardstick that led the tribunal to consider the economic entities registered under Macao laws and regulations as those established under the laws and regulations of the PRC.Footnote ¹²¹ In addition, the definition provided for the Chinese companies in the China-Sri Lanka BIT has made the issue of personal jurisdiction more complicated, as it requires both the elements of place of incorporation and seat to determine the nationality of a juridical person covered by the treaty.Footnote ¹²² This is because the standing of companies incorporated in the SARs is an uncertain issue, as the Company Law of Mainland China has not been expressly extended to the SARs, contrary to the Nationality Law, while leaving Hong Kong and Macao companies to be governed by the laws and regulations enacted by the SARs.Footnote ¹²³ As a consequence, the issue of applicability of the China-Sri Lanka BIT to China's SARs remains far from certain, demonstrating the depth of ambiguity of treaty protection afforded to Chinese investments under the China-Sri Lanka BIT.

A. Dealing with the Paradox Within the Investment Treaty Regime

There are two possible means available for Chinese investors to approach the paradox while remaining within the investment treaty regime. First, they could invoke the application of the MFN clause in the China-Sri Lanka BIT to expand their rights and benefits. Second, they can (re)structure Chinese investments in Sri Lanka through corporate instrumentalities incorporated in another state with which Sri Lanka has a more favourable IIA than that of the existing China-Sri Lanka BIT.

With respect to the former, foreign investors have been effectively relying on the MFN clause to import treatment standards “which are absent from the applicable investment treaty or present in an allegedly less attractive form”.Footnote ¹²⁴ Most arbitral tribunals have accepted the possibility of doing so by means of the operation of the MFN clause.Footnote ¹²⁵ Thus Chinese investors in Sri Lanka who wish to rely on the ISDS mechanism for shielding their investments from host state interference could invoke the MFN clause in the China-Sri Lanka BIT to import advantageous clauses from third-party IIAs made by Sri Lanka. However, the extent to which the restrictive nature of the China-Sri Lanka BIT could be surmounted by invoking the application of the MFN clause is largely dependent on the interpretative approaches, which differ across investment arbitral tribunals.

To be precise, arbitral tribunals have not adopted a uniform approach with respect to the importation of substantive treatment standards absent from the original treaty. The Tribunal in the case of Hochtief v. Argentina opined that the MFN clause could be applied to invoke treatment standards not contained in the basic treaty.Footnote ¹²⁶ In contrast, the Tribunal in the case of Bayindir v. Pakistan accepted the prospective application of the MFN clause to import substantive rights not provided in the basic treaty, subject to limitations imposed on the application of the MFN clause.Footnote ¹²⁷ Accordingly, whether or not Chinese investors could import treatment standards absent from the China-Sri Lanka BIT, such as national treatment, depends on the interpretative approach of the adjudication forum. Similar uncertainty is apparent with respect to the importation of procedural rights. Some arbitral tribunals have accepted the possibility of circumventing limitations in the basic treaty with respect to dispute settlement by means of the operation of the MFN clause.Footnote ¹²⁸ Such tribunals were of the opinion that the distinction between substantive and procedural rules was an irrelevant consideration as the MFN clause applied equally to all the rules of protection of the basic BIT unless otherwise provided.

However, several other tribunals have rejected the importation of procedural rules through the MFN clause unless Contracting Parties have clearly and expressly indicated to the contrary.Footnote ¹²⁹ Most such tribunals were driven by a presumption in favour of the non-application of the MFN clause to procedural rules in situations where there is no clear evidence that the Contracting Parties to the basic BIT wanted the MFN clause to apply to procedural rules by clearly indicating that it should be so interpreted.Footnote ¹³⁰ It is thus apparent that the answer to the general question of whether or not the restrictiveness of the China-Sri Lanka BIT regarding dispute settlement can be surmounted by means of the operation of the MFN clause largely depends on the interpretative approach that will be adopted by an arbitral tribunal.

Second, Chinese investors could (re)structure their investments in Sri Lanka through corporate instrumentalities which are strategically incorporated in another state (a gateway state in this particular case) with which Sri Lanka has a favourable IIA compared to the existing China-Sri Lanka BIT. This corporate practice, which is commonly referred to as “treaty shopping”, will enable Chinese investors to get access to a more favourable Sri Lankan BIT, for the purpose of possible investment treaty arbitrations against Sri Lanka, by tactically planning or altering their corporate nationality.Footnote ¹³¹ Treaty shopping thus provides Chinese investors with an effective way to evade the less attractive China-Sri Lanka BIT to protect their investments against possible host state interference, while remaining within the investment treaty regime. In principle, treaty shopping is not prohibited under international investment law, yet its utility can be limited for several reasons.Footnote ¹³² First, Sri Lanka could include a “denial of benefits clause”, which allows the host state to deny the benefits of the treaty to an investor who is a national of the other Contracting Party, but who does not have genuine business links to that state or does not have substantial business activities in the state of their nationality.

Second, this process would not be helpful for Chinese investors if they restructure their investments in Sri Lanka after an investment dispute has arisen or to obtain treaty protection for a foreseeable investment dispute. This is because it is well established in the investment treaty jurisprudence that restructuring an investment for the purpose of obtaining an inappropriate advantage, without a valid business reason, is an abuse of right to bring an investment treaty claim or an abuse of the procedure which constitutes a violation of fundamental principle of good faith in international law.Footnote ¹³³ Third, room for the successful exploitation of treaty shopping would be limited when Sri Lanka's BIT with the chosen gateway state contains a stringent definition of corporate investor, articulating not only the requirement of incorporation but also requirements such as seat of management and/or substantial business presence in a Contracting Party to the treaty, while excluding mere “mail box” companies.Footnote ¹³⁴ Fourth, and more importantly, it is doubtful whether the Chinese enterprises, particularly China's SOEs, would prefer to structure or restructure their investments through corporate instrumentalities strategically incorporated in another state, masking their Chinese nationality. Indeed, this may dissuade Chinese enterprises from strategically planning or altering their corporate nationality in order to get access to more favourable Sri Lankan BITs. Even if this policy obstacle could be effectively tackled by investing in Sri Lanka through corporate instrumentalities incorporated in one of China's SARs, the fact that Sri Lanka doesn't have separate BITs with Hong Kong and Macao makes this option unviable.

B. Dealing with the Paradox Outside the Investment Treaty Regime

There are two possible means available for Chinese investors to deal with the paradox outside the boundaries of the investment treaty regime. First, they could purchase political risk insurance [PRI] to avoid or mitigate the risk of investing in Sri Lanka. Second, they could rely on the home state to safeguard their interests by framing investment disputes as diplomatic concerns between China and Sri Lanka.

PRI is a commercial tool designed for foreign investors to mitigate and manage the political risk involved in cross-border investments, particularly those in risky and unstable investment environments.Footnote ¹³⁵ Thus, similar to investment treaties, PRI programmes aim to promote cross-border investments by reducing the political risk, operating in parallel with the investment treaty regime. However, in contrast to IIAs, which are treaties between sovereign states, PRIs are basically contracts for indemnification between PRI providers (the insurer) and foreign investors (the insured). Entering into such contracts accordingly helps Chinese investors to avoid potential losses, or to reimburse them in cases of loss incurred by political actions such as adverse government measures, war, and civil strife. As a consequence, seeking damages for potential losses resulting from political risk through the restrictive China-Sri Lanka BIT becomes unnecessary. This option thus seems viable for Chinese investors and, further, they could choose among PRI programmes offered by several service providers in the industry, which includes both public and private PRI providers, as well as several multilateral agencies, such as MIGA.Footnote ¹³⁶ Amongst such PRI providers, Chinese investors would possibly choose the China Export and Credit Insurance Corporation or SINOSURE, China's state-funded policy-oriented insurance company.Footnote ¹³⁷

The recent past has seen Chinese investors, particularly those investing in BRI projects, being encouraged to purchase insurance products from SINOSURE as it aims to protect Chinese investors abroad from economic losses resulting from identified political risks, e.g. expropriation, exchange restrictions, war, political riots, and breach of contract.Footnote ¹³⁸ Generally, and more importantly, publicly funded PRI programmes could have potential impacts on host states’ behaviour towards foreign investors and their investments.Footnote ¹³⁹ This is because the home states of foreign investors may intervene through advocacy or recovery when the host state takes actions which are covered by the home state's PRI programme. Under advocacy, home states could use their diplomatic resources to forestall an event which could trigger insurance claims.Footnote ¹⁴⁰ Under recovery, home states would try their best to recover the value of damages from the host state when the investor makes a claim under the PRI contract.Footnote ¹⁴¹ Perhaps SINOSURE, being a state-funded policy-oriented insurer serving the country's national strategies, would increasingly employ China's diplomatic resources as risk management and asset recovery tools. If so, Chinese investors could benefit from joining China's publicly funded PRI programme while making the home state a prospective actor in its investment relationship with the Sri Lankan government.

Even without joining a publicly funded PRI programme, Chinese investors could make use of diplomatic resources to protect their investments, by persuading the home state to frame investment disputes as diplomatic concerns between China and Sri Lanka. Over the course of history, diplomacy has been employed to protect foreign investments through military, political, or economic pressure on weaker host states by stronger home states.Footnote ¹⁴² Even after the introduction of the ISDS mechanism to resolve investment disputes through a rights-based process, diplomacy has continued to play an important role in managing political risk in cross-border investments through informally settling investment disputes.Footnote ¹⁴³ The “protective” dimension of commercial diplomacy is vital in this respect, as it involves assisting nationals and companies of the home state that have suffered losses and wish to obtain compensation from the host state, through communication and negotiation at state level.Footnote ¹⁴⁴ Commercial diplomacy accordingly provides the Chinese investors with an extra-legal means to manage the political risk in investing in Sri Lanka through official negotiations, which typically take place behind closed doors.

Understandably, this option would not be obtainable when there are no positive diplomatic relations between the two states. Where possible, however, commercial diplomacy is indeed useful in preventing investment disputes between Chinese investors and the Sri Lankan government from maturing into ISDS claims, avoiding the necessity of relying on the restrictive China-Sri Lanka BIT to protect Chinese investments against host state interference. On the one hand, diplomatic-level engagement in a particular investment dispute indicates that the Chinese government takes a dispute seriously and prioritizes it within the broader bilateral relationship between China and Sri Lanka. On the other hand, such diplomatic engagements encourage the Sri Lankan government to settle the dispute, considering other policies such as securing Chinese aid or trade benefits, as well as past and future interactions between the two counties.

C. The Increased Role of the Chinese Government in Protecting Chinese Investment in Sri Lanka

It is thus apparent that Chinese investors in Sri Lanka are not left in a vacuum by the absence of a treaty which affords enhanced investment protection. Instead, they are equipped with both legal and extra-legal means and methods which have their own pros and cons. On the whole, invoking the MFN clause and employing treaty shopping is accompanied by both legal uncertainties and policy obstacles, yet they retain investors’ control over resolving investment disputes. In contrast, joining a publicly funded PRI programme and making use of diplomatic resources could eventually displace investors’ grip over the settlement of an investment dispute due to the home state's introduction on the scene, with statecraft being a prominent feature. The home state's direct involvement could place Chinese investors in a favourable light insofar as China would be seen as willing to pursue the matter at the diplomatic level. Nevertheless, the impact of such diplomatic engagements on Sri Lanka's stance on the issue could be influential, particularly when China's leverage on Sri Lanka is high.

Amongst these alternatives, commercial diplomacy appears to be prominent in protecting Chinese investments in Sri Lanka, leaving rights-based processes behind and increasing the role of the Chinese government. To be precise, the Chinese investor in the case of the Colombo Port City project did not have recourse to the ISDS mechanism to challenge the suspension of the reclamation work, despite having a strong prima facie case against the Sri Lankan government. The investor seemed to be very cautious with regard to enforcing its rights through the investment treaty regime as there was no reported attempt made to gain access to more favourable Sri Lankan BITs for the purpose of bringing an ISDS claim against Sri Lanka by strategically (re)structuring its investment. Similarly, no records are available showing that the investor made any PRI claim to reimburse economic losses incurred due to the sudden adjournment of the project, even though it reportedly sought compensation from the Sri Lanka government during the period of closure, indicating the strength of its case against the host state. Against this backdrop, it was commercial diplomacy that played the major role in resolving the issue, as high policy-level negotiations between Beijing and Colombo eventually assured that the project would continue, even under amended terms and conditions.Footnote ¹⁴⁵

From a legal perspective, this could perhaps be an outcome of the Chinese investor's reduced confidence in winning an ISDS claim against Sri Lanka based on the pro-state and restrictive China-Sri Lanka BIT. From the policy perspective, it could possibly be a result of the investor's increased reliance on the home state in settling investment disputes due to the dominant role of the Chinese government in planning, encouraging, funding, and regulating investments along the BRI.Footnote ¹⁴⁶ Whatever the reason behind commercial diplomacy being the means to resolve the issue, it was ultimately steered to an apparently win-win solution that was mutually acceptable to the parties to the investment dispute. This is because negotiations at the state level, which unsurprisingly occurred behind closed doors, assured the resumption of the suspended Colombo Port City project, safeguarding interests of the Chinese investor. Correspondingly, Sri Lanka was said to be relieved from potential liability to pay compensation to the aggrieved investor, while omitting the much-disputed promise to provide the investor with a plot of land on a “free hold basis” from the landfill.Footnote ¹⁴⁷

All in all, this scenario demonstrated the Chinese investor's increased reliance on government intervention and negotiation in resolving the investment dispute, rather than employing a rights-based process therein. If that is the case, the pro-state and restrictive nature of the existing China-Sri Lanka BIT necessarily becomes an impetus, rather than a matter of great concern, for Chinese investors to employ commercial diplomacy as a means of protecting their investments against host state interference. At the same time, the extent to which Chinese investors rely on the investment treaty regime to protect their investments is still far from certain, despite recent developments indicating that Chinese investors may be becoming more litigious, even if the existing China-Sri Lanka BIT will be replaced with a rigorous investment treaty which effectively facilitates the enforcement of legal rights through the ISDS mechanism.Footnote ¹⁴⁸ Thus, the Chinese government will presumably play an important role in the behind-the-scenes settlement of investment disputes arising from increased Chinese investments in Sri Lanka, while thrusting the settlement of investment disputes along the BRI deeper into statecraft and amplifying the state-driven nature of the initiative.