2.1. Disputes crystallize after the commencement of a later agreement

China and Pakistan concluded a BIT in 1989Footnote ¹⁶ and an FTA in 2006.Footnote ¹⁷ The FTA contains an investment chapter that provides a higher level of protection to investors and investments than the 1989 BIT. Article 3 of the China-Pakistan FTA provides that the contracting parties affirm the existing rights and obligations under the WTO Agreement and other agreements to which both parties are members. There are two possible interpretations of Article 3. The first view is that, either the FTA is subject to the BIT, or the FTA is simply considered to be incompatible with the BIT.Footnote ¹⁸ The basis for this view is that, under Article 30.2 of the Vienna Convention on the Law of Treaties (VCLT),Footnote ¹⁹ the BIT takes precedence over the FTA. The second view is that, because Article 55 of the China-Pakistan FTA provides that the FTA will not affect more favourable treatment to investors in existing or future agreements, the FTA only confirms the existing rights and obligations under the other agreements which are more favourable to investors and investments than the FTA. In this view, the BIT takes precedence over the FTA only if the BIT gives more favourable treatment to investors and investments. The second view should be preferred because, according to Articles 30 and 31 of the VCLT generally, Articles 3 and 55 of the FTA must be construed together in light of the object and purpose of the FTA, parties’ subsequent practice and special intention. The preamble of the FTA indicates that the FTA builds on existing treaties between parties and resolves to promote reciprocal trade, raise the standard of living and lower unemployment. After concluding the FTA, both states implemented the high standard of protection required under the FTA rather than staying with the low standard BIT.Footnote ²⁰ Since 2015, China and Pakistan have negotiated to expand their FTA and further liberalize bilateral trade and investment.Footnote ²¹ It was not the parties’ intention, despite Article 3, that the 1989 BIT should prevail over the FTA, so the investment regime between the two states remains as the 1989 version. Moreover, the first interpretation prioritizes the BIT over the FTA, which is a result manifestly absurd or unreasonableFootnote ²² under Article 32 of the VCLT. Article 73, paragraph 1 of the Vienna Convention on Consular Relations is a classic example of a Convention conceding priority to other treaties.Footnote ²³ However, it is improper to conclude that, simply because Article 3 of the China-Pakistan FTA is similarly worded to Article 73, paragraph 1 of the Vienna Convention on Consular Relations, the lex prior rule should be applied to the FTA without qualification. Article 30.2 of the VCLT ‘concerns solely . . . the conflict clause in a treaty which aims at granting priority to another treaty’.Footnote ²⁴ Article 3 of the China-Pakistan FTA does not aim to give priority to less favourable investment treatments, as this would be against the parties’ intention.Footnote ²⁵

Serious vertical treaty overlap also exists between China and South Korea. The China-South Korea FTA was concluded in 2015, the China-Japan-South Korea Investment Agreement in 2012, and the China-South Korea BIT in 2007.Footnote ²⁶ Article 25 of the China-Japan-South Korea Investment Agreement and Article 1.3 of the China-South Korea FTA are similar to Articles 3 and 55 of the China-Pakistan FTA. The above arguments apply here as well. These articles should not be construed so that earlier treaties, which are less favourable to investment, should prevail over later treaties.Footnote ²⁷ One issue with this interpretation is, if all three treaties are applicable to an investment dispute, can investors select favourable clauses from each treaty and combine them for the most effective protection? This is possible. Ioannis Kardassopoulos v. Georgia demonstrates that an investor can combine favourable substantive and jurisdictional clauses from different treaties concluded by the same states in investment arbitration. Both Greece and Georgia are members of the Energy Charter Treaty (ECT) and a BIT. Mr. Kardassopoulos was a Greek national who invested in Georgia. His claim utilized both the ECT and the Greece-Georgia BIT. The tribunal, after deciding it had jurisdiction ratione materiae under both the ECT and the BIT,Footnote ²⁸ held that it also had jurisdiction ratione temporis under the ECT.Footnote ²⁹ However, since the tribunal eventually found that Georgia had violated the ECT by expropriating Mr. Kardassopoulos’ investment, determining the question of jurisdiction ratione temporis under the Georgia-Greece BIT was unnecessary.Footnote ³⁰

If contracting states’ purpose for the upgrade is to improve investment protection, an FTA easily achieves this goal without the need to maintain the old one. In domestic law, old laws are repealed when a new law applicable to the same subject matter is enacted. The underlying policy to this approach is to consolidate laws, facilitate their implementation and assist lawyers and judicial bodies with application of the law. In sharp contrast, the international investment regime norm is that new FTAs neither replace old BITs nor contain clear application clauses; yet states complain that investment arbitration tribunals have too much discretion in interpreting and applying treaties.Footnote ³¹ Good practice would be to terminate an old BIT when signing a new FTA with a comprehensive investment protection regime. For example, Australia plans to terminate its BITs with Mexico, Peru and Vietnam in due course after the Trans-Pacific Partnership Agreement (TPP) comes into effect.Footnote ³² Although the US withdrawal makes the future of the TPP uncertain,Footnote ³³ the Australian plan should be applauded because it avoids the uncertainty in applicable law.

2.2. Disputes crystallize before the commencement of a later agreement

The China-ASEAN Investment Agreement,Footnote ³⁴ the China-New Zealand FTA,Footnote ³⁵ the China-Australia FTAFootnote ³⁶ , and the China-Peru FTAFootnote ³⁷ contain application clauses for jurisdiction over disputes that crystallized before the commencement of the Agreements. Of the four, the China-ASEAN Investment Agreement has the most comprehensive application clause.

China and the ASEAN members (Laos, Cambodia, Indonesia, Malaysia, Thailand, Myanmar, the Philippines, Singapore, and Viet Nam) all concluded BITs. Afterwards, in 2009, China and the ASEAN signed an Investment Agreement. According to Article 3.2 of the China-ASEAN Investment Agreement, although the Agreement applies to all investments made by investors of a party in the territory of the other party before or after the Agreement entered into force, it does not bind any party in relation to any act or fact that took place or any situation that did not exist before the date of its entry into force.Footnote ³⁸ Article 14.2 provides that the investor-state dispute resolution mechanism does not apply to investment disputes arising out of events which occurred and investment disputes which were settled or already under judicial or arbitral process, prior to the entry into force of this agreement.Footnote ³⁹ Article 23 outlines the Agreement's relationship with other agreements in that it shall not derogate from the existing rights and obligations of a member state under any other international agreements to which it is a party.Footnote ⁴⁰ The three articles complement one another: Article 3.2 regulates the scope of application to investment, Article 14.2 specifies when the investor-state dispute resolution mechanism cannot be applied, and Article 23 provides that the China-ASEAN Investment Agreement coexists with the BITs that China concluded with individual ASEAN members.

The application clauses in the China-New Zealand FTA are different from those in the China-ASEAN Investment Agreement. The BIT between China and New Zealand came into force in 1989 and the FTA in 2008. Article 137 of the China-New Zealand FTA provides the scope of its investment chapter. Article 137.4 indicates that the provisions of the investment chapter do not bind either party in relation to any act or fact that took place or any situation that did not exist before the date of its entry into force.Footnote ⁴¹ Article 137.6 replicates Article 3.2 of the China-ASEAN Investment Agreement but adds that the investor-state dispute resolution regime does not apply to any investment dispute or claim already under judicial or arbitral process before the entry into force of the Agreement.Footnote ⁴² The second half of Article 137.6 is broader than Article 14.2 of the China-ASEAN Investment Agreement. Article 3 provides that the China-New Zealand FTA coexists with other agreements to which China and New Zealand are parties and, in the event of inconsistency, the parties shall immediately negotiate to find a mutually satisfactory solution.Footnote ⁴³ Different from Article 23 of the China-ASEAN Investment, Article 3 of the China-New Zealand FTA provides a procedure in the event of inconsistency.

Suppose a Chinese investor made an investment in Laos in 2006 and the expropriation dispute between this investor and the Laos Government crystallized in 2007. In terms of jurisdiction ratione temporis, the investment is covered by the China-ASEAN Investment Agreement according to its Article 3.2. However, the investor cannot invoke the investor-state dispute resolution mechanism in the Agreement because of Article 14.2. The dispute must then be solved under the China-Laos BIT (1993).Footnote ⁴⁴

Suppose the same events transpired in New Zealand. In terms of jurisdiction ratione temporis, the investment is covered by Article 137.6 of the China-New Zealand FTA. However, Article 137.4 excludes the expropriation dispute because it is an act or fact that took place before the commencement of the China-New Zealand FTA. The China-New Zealand BIT (1988)Footnote ⁴⁵ should be applied to this dispute.

Therefore, although the same result may be reached under the two FTAs, the reasoning is different. Article 3.2 of the China-ASEAN Investment Agreement and Article 137 of the China-New Zealand FTA are phrased similarly; however, the former applies to investment only while the latter applies to the whole investment chapter. The latter is applicable to expropriation measures but the former is not.

The application clauses in an FTA can generally resolve jurisdiction for disputes which crystallized before its entry into force. However, overlap between the FTA and an old BIT between the same parties still exists for disputes crystallizing after the commencement of the FTA. Investors may bring arbitration under the International Centre for Settlement of Investment Disputes (ICSID) mechanism of the FTA and, if it fails, they can bring ad hoc arbitration by invoking the old BIT on the same facts, or vice versa. Thus, the Coexistence Model allows the investor to bite the same apple twice, creates uncertainty in treaty application, and the possibility of undesirable treaty shopping.

2.3. Incorporation

Incorporating the BIT into the FTA can avoid vertical treaty overlaps. For example, China concluded a BIT with Iceland in 1994 and an FTA in 2013. The latter incorporated the former into its investment chapter.Footnote ⁴⁶ Thus, although the China-Iceland FTA and the China-Iceland BIT are both valid, there are no treaty applicability issues. Nevertheless, incorporation is like pouring old wine (BIT) into a new bottle (FTA). The level of investment protection and promotion between China and Iceland remains as it was in 1994.

The relationship between the China-Singapore BIT (1985), the China-Singapore FTA (2008), and the China-ASEAN Investment Agreement is a more complicated case. The China-Singapore FTA was signed before the conclusion of the China-ASEAN Investment Agreement. Taking into consideration that Singapore would be party to the, at the time, soon to be concluded China-ASEAN Investment Agreement, Article 84 of the China-Singapore FTA incorporated the China-ASEAN Investment Agreement into its investment chapter, with the latter prevailing in the event of conflict. This clause resolves the applicability issue between the China-Singapore FTA and the China-ASEAN Investment Agreement. However, the China-Singapore FTA did not replace the China-Singapore BIT (1985), because Article 112 of the FTA provides that it does not derogate existing obligations and rights under existing bilateral and multilateral agreements between the parties conclude.Footnote ⁴⁷ In case of inconsistency the parties shall immediately consult with each other,Footnote ⁴⁸ but the FTA does not provide which treaty prevails. As Article 14.2 of the China-ASEAN Investment Agreement was incorporated into the FTA,Footnote ⁴⁹ the China-Singapore FTA does not apply to investment disputes arising out of events that occurred and investment disputes which had been settled or were already under judicial or arbitral process, prior to the entry into force of this agreement. However, this Article does not help resolve the treaty overlap between the China-Singapore FTA (2008) and the China-Singapore BIT (1985), if the event crystallizes after the FTA came into force.

3.1. Jurisdiction ratione temporis over investment

China and Nigeria concluded a BIT in 2001 to replace the BIT signed in 1997. Article 11 of the 2001 BIT states: ‘[t]his Agreement shall apply to investments, which are made prior to or after its entry into force by investors of either Contracting Party . . .’. The 2001 BIT is silent on jurisdiction ratione temporis over investment disputes. Jurisdiction ratione temporis over investment made before the commencement of the new BIT does not necessarily connote jurisdiction ratione temporis for arbitral tribunals to hear disputes which occurred before the commencement date of the BIT. For example, Walter Bau AG v. Thailand involved two successive BITs which adopted the Replacement Model. Germany and Thailand concluded a BIT in 1961. Later in 2002, they signed a new BIT, which took effect in 2004 and terminated the 1961 BIT. The 1961 BIT did not permit investor-state claims and provided only for state-to-state claims. The 2002 BIT does not expressly restrict claims that arose before its commencement. The survival clause in the 1961 BIT provided that it continues to apply for ten years after termination over investment made prior to its termination. This case concerns the 2002 BIT, which provides for ICSID arbitration. The Walter Bau tribunal held that, although the 2002 BIT could apply to investment made before its entry into force, the dispute resolution clause in the 2002 BIT did not provide the tribunal jurisdiction ratione temporis to consider disputes that had arisen before the commencement of the 2002 BIT.Footnote ⁵² Essentially, this award demonstrates that if a later BIT allows for investor-state arbitration when the earlier BIT does not, the dispute resolution settlement provision of the former will not displace the presumption against retroactivity under Article 28 of the VCLT.Footnote ⁵³

3.2. Jurisdiction ratione temporis over investment and investment disputes

Ten of China's BITs contain transition clauses that provide jurisdiction ratione temporis over investment and investment disputes.Footnote ⁵⁴ A typical example is Article 10 of the China-Belgium BIT, which was signed in 2005 and entered into force in 2009 (the China-Belgium BIT (2009)). Article 10 has two paragraphs. The first paragraph provides that the China-Belgium BIT (2009) substitutes and replaces the old BIT that came into force in 1986 (the China-Belgium BIT (1986)). The second paragraph indicates that the China-Belgium BIT (2009):

Similar articles have been adopted by many of China's BITs, such as Article 16 of the China-Germany BIT (2003) (replacing the China-Germany BIT(1983)), Article 11 of the China-France BIT (2005) (replacing the China-France BIT(1984)), Article 10 of the China-Finland BIT (2004) (replacing the China-Finland BIT (1984)), Article 10 of China-Holland BIT (2001) (replacing the China-Holland BIT (1985)), and Article 12 of the China-Spain BIT (2005) (replacing the China-Spain BIT (1992)).

Ping An v. Belgium shows that this widely-adopted article may create controversies in jurisdiction ratione temporis over investment disputes.Footnote ⁵⁶ In Ping An, the dispute arose under the 1986 BIT, before the 2009 BIT came into force. The claimants relied on the 1986 BIT for the substance of their claim and on the 2009 BIT for jurisdiction to utilize the ICSID tribunal, rather than resolve the dispute by ad hoc arbitration as prescribed by the 1986 BIT. The claimants argued that the dispute was not under judicial or arbitral process before the commencement of the 2009 BIT, so the 2009 BIT should be applied. The tribunal held that Article 10.2 does not necessarily imply this.Footnote ⁵⁷ Firstly, the tribunal considered the wording of the notification procedure under the 2009 BIT, which states ‘[w]hen a legal dispute arises between an investor of one Contracting Party and the other Contracting Party, either party to the dispute shall notify the other party to the dispute in writing’.Footnote ⁵⁸ The tribunal held that use of ‘arises’ and ‘notify’, instead of ‘arises or has arisen’ and ‘notify or shall have notified’, means that the notification procedure of the 2009 BIT is not applicable to disputes that have arisen and been notified of before its entry into force.Footnote ⁵⁹ Article 10.2 should be read together with the notification procedure to refer to disputes arising after the 2009 BIT came into force. Secondly, it cannot be inferred from the preamble and Article 10 of the 2009 BIT that it applies to pre-2009 disputes notified under the earlier BIT but not under judicial or arbitral process. Thirdly, an expansive interpretation of the 2009 BIT would apply its wider dispute resolution clause to a dispute already notified under the 1986 BIT, which has a more restrictive dispute resolution clause. The tribunal holds that if this were the contracting states’ true intention, it would have been expressly stated in the treaty.

The tribunal concluded that neither express or implied language in the 2009 BIT can justify the application of more extensive remedies from the 2009 BIT to pre-existing disputes that were notified under the 1986 BIT but not yet subject to arbitral or judicial process.Footnote ⁶⁰ Such disputes should be resolved under the 1986 BIT.Footnote ⁶¹

If contracting states intend to apply the expansive investor-state dispute resolution under a new BIT to disputes not yet under judicial or arbitral process before its commencement, it must be explicitly stated in the transition clause or preamble of the new BIT. For example, transition clauses in the China-Portugal BIT (2005) (replacing the China-Portugal BIT (1992)) and the China-South Korea BIT (2007) (replacing the China-South Korea BIT (1992)) provide that if an investment dispute arose before the new BIT comes into effect, this dispute shall be bound by the old BIT regardless of whether it was already under judicial or arbitral process.Footnote ⁶²

4.1. Amendment to the substantive rights and obligations of contracting states

China concluded protocols to amend the China-Bulgaria BIT (1989), the China-Czechoslovakia BIT (1991), and the China-Romania BIT (1994).Footnote ⁶³ The amendments cover the national treatment clause and the transfer clause of the old BITs.Footnote ⁶⁴ National treatment and transfer concerns substantive rights and obligations of the states to protect investment and investors; for example, substantive rights and obligations in investor-state arbitration, as opposed to determining jurisdiction. Article 28 of VCLT provides:

An amendment to the substantive rights and obligations of a BIT cannot be applied retroactively. For example, in Liechtenstein v. Germany, the European Court of Human Rights declined to hear a dispute on expropriation which took place prior to the entry into force of the European Convention on Human Rights.Footnote ⁶⁵

The three Chinese protocols mentioned above do not substantially amend old BITs. Consequently, the investment regime between China and Bulgaria, Czechoslovakia and Romania has not improved significantly. If China and its contracting states believe an old BIT has failed to serve their economic needs and they have the political will to significantly upgrade it, they should either follow the Modification concluded by China and Cuba to dramatically amend the old BIT (the Modification of the China-Cuba BIT, which will be discussed later),Footnote ⁶⁶ or they should adopt the Replacement Model using a new BIT to replace the old one.

4.2. Amendment to jurisdiction of a BIT

China and Cuba concluded a BIT in 1995 and signed the Modification of the China-Cuba BIT in 2007. The Modification not only amends the substantive rights and obligations of the parties but also expands the jurisdiction of investor-state arbitration.Footnote ⁶⁷ Prior to the amendment, investor-state arbitration only applied to disputes over the amount of compensation paid for expropriation.Footnote ⁶⁸ After the amendment, arbitration could be applied to all disputes.Footnote ⁶⁹ Like the protocols between China and Bulgaria, Czechoslovakia and Romania, respectively, the Modification of the China-Cuba BIT only indicates the date of its entry into force: ‘[t]hese modifications shall enter into force the first day of the month following the date on which both Contracting parties have notified each other in writing that their respective internal legal procedures have been concluded’.Footnote ⁷⁰ It does not contain a transition or application clause to determine whether it is applicable to disputes that crystallized before its commencement. Different from the amendment to substantive rights and obligations, the amendment to the jurisdiction of the BIT can be applied to disputes that crystallized before it came into effect. This was the conclusion reached in Nordzucker AG v. Poland. Footnote ⁷¹ Germany and Poland signed a BIT in 1991 containing an investor-state arbitration clause limited to expropriation and capital transfer. The two countries then concluded a Protocol in 2005 (‘the Germany-Poland Protocol (2005)’) to amend the 1991 BIT, expanding the investor-state arbitration clause to all investment disputes. The Germany-Poland Protocol (2005) does not contain a transition clause to help determine whether it applies to disputes crystallizing before its commencement. The Germany-Poland Protocol came into force on 28 October 2005. In Nordzucker, the disputes crystallized before the commencement of the Germany-Poland Protocol (2005) but the claimant submitted the disputes to investor-state arbitration. The claimant argued that the extensive investor-state arbitration clause in the Germany-Poland Protocol (2005) should be applied. The tribunal distinguished the substantive obligation (to protect investments) which must have been in force at the time of the alleged breach of that obligation and the procedural obligation to arbitrate which only needed to be in force at the time of filing the dispute,Footnote ⁷² and came to the conclusion that the distinction was important when substantive and procedural rights and obligations were not created simultaneously. The tribunal held that, unless a different intention appears from the BIT, Protocol or otherwise, the investor-state arbitration clause in the Protocol governed not only future breaches, but also past breaches as long as they were not time-barred or had otherwise become inadmissible when the Protocol became effective.Footnote ⁷³ This is not a retroactive application of the investor-state arbitration clause, but a correct application of Article 28 of the VCLT.Footnote ⁷⁴ As Article 28 does not specify that it applies only to substantive rights and obligations, it may apply to jurisdiction as well. The tribunal held that ‘“any act of fact which took place before the date of the entry into force of the Treaty” may have a different meaning, depending on the substantive or procedural nature of the provision or obligation which is at stake’.Footnote ⁷⁵ After analyzing the context, object, and purposes of the BIT and its Protocol, as well as the wording of other Polish BITs, the tribunal concluded that no alternative intention existed in the BIT and Protocol.Footnote ⁷⁶ Therefore, the 2005 Protocol applies to ‘old’ disputes, provided they constitute a breach of the 1991 BIT.Footnote ⁷⁷ Another example is Tradex v. Albania.Footnote ⁷⁸ The dispute crystallized before Albanian investment law providing for ICSID arbitration entered into force.Footnote ⁷⁹ The Tradex tribunal found that the arbitration provision in the new law could be invoked for the ‘old’ dispute.Footnote ⁸⁰

In the Amendment Model, modification of jurisdiction can govern disputes that arose before it came into force, unless parties indicate otherwise. However, in the Replacement Model, a new BIT may not be applied to disputes crystallizing prior to its commencement. The reason is that, in the Amendment Model, states generally do not put a transition clause in the amendment to carve out disputes existing before the commencement of the amended jurisdiction clause. With the Replacement Model, transition clauses are included to restrict jurisdiction ratione temporis over investment and/or investment disputes. Moreover, in the Amendment Model, un-amended substantive rights and obligations become effective earlier than the amended jurisdiction clause, whereas they become effective simultaneously with the jurisdiction clause in the Replacement Model when the new BIT replaces the old one. As the Nordzucker tribunal indicates, the immediate applicability of a jurisdictional clause of an amendment implies that it can also be applied to pre-exit events, provided that those events breached the BIT at the time they occurred and arbitration was brought after the commencement of the amendment.Footnote ⁸¹

If an amendment removes rather than bestows on investors the right to investment arbitration, could this procedural amendment govern disputes that have already crystallized? The answer is yes if the investor commences arbitration after the commencement of the amendment, the amendment has no transition clause, the amendment to jurisdiction is applicable immediately, and state parties do not intend to carve out pre-existing disputes. This amendment will have a negative effect on investors who have pre-existing disputes. A BIT is a triangular treaty which is signed by states but gives rights to a third party (investors).Footnote ⁸² However, for two reasons it is difficult for the investor to argue that an amendment does not apply. Firstly, the Amendment Model will not trigger the survival clause of a BIT. Survival clauses in China's BITs generally provide for a treaty to remain effective for ten years and continue in force if not terminated. After the initial ten-year period, either contracting state may, with one year's written notice, terminate the BIT, after which the BIT will continue to apply to investments made prior to the date of termination for a further period of ten years from the date of termination.Footnote ⁸³ The wording ‘either contracting state’ means the survival clause is relevant only to unilateral termination and not amendments jointly made by two states. Secondly, Article 70 of the VCLT provides that, unless otherwise agreed, termination of a treaty shall not affect any existing right, obligation or legal situation of the parties. ‘Parties’ refers to contracting states to a treaty, not investor-beneficiaries of a BIT. To be a responsible host state, China should avoid using the Amendment Model to restrict the jurisdiction of a BIT. For example, when the US and Morocco signed an FTA and jointly terminated the US-Morocco BIT, they permitted investor-state and state-to-state claims with respect to existing investments and investment disputes arising under the BIT to continue for another ten years from the date of replacement.Footnote ⁸⁴ This demonstrated their policy objectives to protect and promote foreign investment.

5.1. Sanum v. Laos

In 1987, China and Portugal signed a Joint Declaration on the Question of Macau, as Macau was at the time a Portuguese colony, which specified the procedure and requirements under which Macau would be transferred to Chinese sovereignty in 1999.Footnote ⁹¹ The China-Laos BIT was concluded and became effective in 1993. It does not explicitly indicate its applicability to Macau. When Macau was returned to China, it became a SARFootnote ⁹² under China's ‘One Country, Two System’ regime in 1999.Footnote ⁹³ Both China and Laos were silent on whether the BIT extended to Macau after the handover. The silence was maintained even after the China-Laos BIT was renewed in 2003.

The Singapore Court of Appeal held that China's diplomatic announcements were inadmissible and, even if admitted, they did not change the applicability of the China-Laos BIT to Macau.Footnote ⁹⁴ Firstly, the court held that the ‘moving treaty frontier’ rule (MTF Rule) under Article 15 of the Vienna Convention on Succession of States (VCST) and Article 29 of VCLT constituted customary international law and should be applied. According to the MTF Rule, after China took sovereignty of Macau, Chinese treaties (including the China-Laos BIT) presumably applied to Macau from the date of the succession, unless an intention ‘appears’ from the BIT or ‘otherwise established’ evidence shows that it does not. The text, objects, and purposes of the China-Laos BIT, as well as the circumstances of its conclusion, show no intention to displace the MTF Rule. The silence of China and Laos favours the conclusion that the default MTF Rule was not displaced when the dispute crystallized.

Secondly, even assuming that evidence prior to the date when the dispute crystallized (‘the critical date’) is inconclusive on whether the China-Laos BIT applies to Macau so diplomatic announcements are admissible, the announcements should not constitute a retroactive amendment of the BIT. This is because the MTF Rule is customary international law that can be derogated only if the parties to a treaty expressly agree or share an understanding that it will be excluded. Even if China had intended to exclude the MTF Rule in relation to Macau by way of the China-Portugal Joint Declaration in 1987, Laos did not express its agreement before the dispute with Sanum crystallized. The diplomatic announcements do not prove that China and Laos shared a common understanding over the applicability of the BIT to Macau prior to the crystallization of the dispute. The diplomatic announcements are not interpretations of the BIT, rather they are ‘based on an understanding of how the rules of international law would apply to the two states in light of the domestic constitutional arrangements in [China]’.Footnote ⁹⁵ China's domestic arrangements should not affect the applicability of international law, namely the MTF Rule. Therefore, the BIT should be applied to Macau.

The reasoning of the Singapore Court of Appeal contrasts with that of Tza Yap Shum v. Peru, which is the first investment arbitration involving an investor from China's SAR who would like to apply a BIT concluded by China.Footnote ⁹⁶ The tribunal held that whether the China-Peru BIT (1994) should be applied to Tza depends on his nationality and whether he is a Chinese national is a Chinese domestic law issue. The Chinese Nationality Law confers Chinese nationality to natural persons of Chinese descent born in China.Footnote ⁹⁷ The Hong Kong Basic Law provides that Chinese Nationality Law applies to Hong Kong, so Hong Kong residents of Chinese descent and born in the Chinese territories (including Hong Kong) are Chinese nationals.Footnote ⁹⁸ Because the definition of ‘investor’ in the China-Peru BIT rests on nationality, the tribunal held that Tza had a standing to bring arbitration under this BIT. Following this logic, Sanum would not be able to invoke the China-Laos BIT.Footnote ⁹⁹ Sanum is a corporate established according to Macau law. Article 1.2(b) of the China-Laos BIT provides that it applies to economic entities established in accordance with the laws and regulations of each contracting state. The Macau Basic Law does not indicate that Chinese Corporate Law applies to Macau.Footnote ¹⁰⁰ Therefore, Sanum is not a qualified investor under the China-Laos BIT.Footnote ¹⁰¹

It is unsurprising that soon after the Singapore Court of Appeal rendered its judgment, China's Foreign Ministry Spokesperson stated that this judgment was incorrect.Footnote ¹⁰² As a principle, the BITs that China concluded 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 party of a BIT.Footnote ¹⁰³

5.2. Applicability of China's BITs to its SARs

China has 5,000 years of ancient history glory, but Hong Kong and Macau remind it of its modern history of semi-colonization. China disagrees that the handover of Macau and Hong Kong from Portugal and the UK, respectively, is state succession. During negotiations with the UK and Portugal, China repeatedly emphasized its historical sovereignty over Hong Kong and Macau and how resumption of that sovereignty is unrelated to state succession.Footnote ¹⁰⁴ For China, the MTF Rule should not be applied because it is a rule for state succession.Footnote ¹⁰⁵

The Singapore Court of Appeal does not discuss whether the turnover of Macau from Portugal to China is state succession. This is because both Sanum and Laos did not dispute on this point.Footnote ¹⁰⁶ Under public international law, whether the turnover of a territory to a state is a state succession is not only based upon the view of international community but also the self-perception of the states involved.Footnote ¹⁰⁷ Sanum is not only concerned with the interests of Sanum and Laos, but also has great implications on China. China is a third party which has a direct interest in the outcome of the case. Sanum's acceptance of VCST cannot represent China's position. Although the court has no obligation to, it may consider China's opinion at least as an amicus brief. Even if the court holds that it is unnecessary to consider China's opinion because it only decides the jurisdiction of the particular dispute between Sanum and Laos, the court should refrain from making a sweeping conclusion that the China-Laos BIT applies to Macau generally before the critical date. A more precise judgment should be that the China-Laos BIT applies to Sanum and its investment before the critical date. A good practice is the Tza award where the tribunal explicitly indicates that it deals with Tza's investment only and ‘determining the applicability of the Peru-China BIT to Hong Kong is unnecessary’.Footnote ¹⁰⁸

Although Article 27 of the VCLT provides that a party may not invoke its internal law to justify its failure to perform a treaty, Article 27 is without prejudice to Article 46.Footnote ¹⁰⁹ Article 46 provides that if a state's violation of its internal law regarding its competence to conclude a treaty is manifest and concerned a fundamental rule of domestic law, the state can withdraw its consent to the treaty: ‘A violation is manifest if it would be objectively evident to any State conducting itself in the matter in accordance with normal practice and in good faith.’Footnote ¹¹⁰ If China concludes a BIT and applies it to Macau without consulting the Macau Government, China manifestly violates the Macau Basic Law.Footnote ¹¹¹ Article 2 of the Macau Basic Law provides that Macau has a high degree of autonomy and enjoys executive, legislative, and independent judicial power.Footnote ¹¹² This high degree of autonomy derives from the China-Portugal Joint Declaration. Article 136 of the Macau Basic Law authorizes the SAR Government to conclude treaties with a foreign state in appropriate fields including the economic, trade, financial and monetary, shipping, communications, tourism, cultural, science and technology, and sports fields.Footnote ¹¹³ Accordingly, after reuniting with China, Hong Kong and Macau have concluded many treaties with foreign states.Footnote ¹¹⁴ Article 138 provides that the application to the SAR of international agreements to which China is a member or becomes a party shall be decided by the Central Government after seeking the views of the SAR Government.Footnote ¹¹⁵ Considering the fundamental importance of ‘One Country, Two Systems’ to China and as an international commitment to Portugal, the Singapore Court of Appeal should have exhibited more caution in rejecting China's diplomatic announcements.

Article 31.3(a) of the VCLT requires that any subsequent agreement between member states regarding the interpretation of a treaty shall be taken into account. If the subsequent agreement is an interpretation of the treaty, it should be applied both retroactively and proactively. However, member states to a BIT have dual roles as ‘treaty parties (with an interest in interpretation) and actual or potential respondents in investor-state disputes (with an interest in avoiding liability)’.Footnote ¹¹⁶ Therefore, courts and arbitration tribunals are with caution when member states make a joint interpretation detrimental to an investor's interests after an investment dispute crystalizes.Footnote ¹¹⁷ In Sanum, China's diplomatic announcements were made at a very late stage, after the tribunal had rendered the award. China and Laos are improperly silent regarding whether the BIT shall be applied to China's SARs even after it has been renewed. In this scenario, the tension between Laos’ role as a treaty party and respondent becomes stark. The Singapore Court of Appeal does not find convincing evidence to support that China and Laos had agreed upon the territorial application of the BIT before the investment dispute crystalized. From this aspect, the Singapore Court of Appeal's decision that China's diplomatic announcements shall not be applied to Sanum is supported by the general presumption of international law against retroactivity.

To avoid uncertainties and controversies,Footnote ¹¹⁸ China should review its BITs and work with its contracting states to clarify whether its BITs apply to SARs.Footnote ¹¹⁹ China's FTAs generally contain a territorial application provision providing that the FTAs apply to the customs territory of China.Footnote ¹²⁰ This excludes SARs because they are separate customs territories. In contrast, China's BITs, except the China-Russia BIT,Footnote ¹²¹ do not include such a provision. It is unclear whether this omission was deliberate because China has not completed consultation procedures with its SARs governments or whether China and its contracting states improperly ignore the applicability of the BITs to China's SARs. Nevertheless, non-application of China's BITs to its SARs is a double-edged sword. SARs are of special significance in China's investment regime, because China's SARs have served as a critical springboard for China's outbound investment.Footnote ¹²² China needs to carefully review all of its BITs and make diplomatic announcements to clarify their applicability to SARs. This may balance China's domestic constitutional requirement, historical and political pride, and protection and promotion of international investment.