VDB Loi Client Briefing Note – 17 March 2014
A practical look at the 2013 Myanmar-Japan bilateral investment treaty
On 25 December 2013, Japan and Myanmar signed their first bilateral investment treaty, officially called the “Agreement between the government of Japan and the government of the Republic of the Union of Myanmar for the liberalisation, promotion and protection of investment” (the Myanmar-Japan BIT). The Myanmar-Japan BIT is not in force yet. It will only enter into force 30 days after both countries have carried out the necessary legal procedures for the entry into force in each state.
Investment treaties such as this BIT establish standards of protection for host states to respect with regard to foreign investments. Host states must extend fair and equitable treatment, national treatment and most-favored nation treatment to foreign investors, allow the transfer of funds, and may not expropriate the property of a foreign investor without due process and compensation. BITs also give investors the right to an investor-state dispute settlement procedure such as international arbitration.
The facts underlying a case often concern the withdrawal of a license, the inability to repatriate currency, breaches of contracts with investors, irregularities in public tenders, changes to domestic regulatory frameworks, withdrawal of previously granted subsidies, direct expropriations of investments, tax measures and others. Myanmar does not have a bad track record when it comes to investor-state arbitrations. It has only one known case to date, notably Yaung Chi Oo Trading Pte Ltd v. Government of the Union of Myanmar (ICSID Additional Facility Rules Case No. ARB/01/1 (31 March 2003), 42 ILM 540 (2003), which was actually won by the Myanmar Government.
Here are a few points of the Myanmar-Japan BIT which caught our attention.
Protection only kicks inregistered in Myanmar after the investment is registered in Myanmar.
A note to Art. 1(b) on the definition of “investor” makes it clear that there is no protection for a project until the investment has been properly registered in Myanmar.
Note: It is understood that an investor of a Contracting Party seeks to make investments in the Area of the other Contracting Party only when the investor has taken concrete steps necessary to make investments, such as when the investor has made an application for a permit or licence which authorises the establishment of investments.
This means that the Myanmar-Japan BIT will only protect an investor after that investor has at least lodged an application for approval. A BIT is indeed mostly about the treatment of investments once they are established, not about the access to a market. Access to markets is covered in Trade in Goods and Trade in Services agreements, such as the ASEAN-Japan Free Trade Agreement, which is also binding upon Myanmar.
Nevertheless, we feel that this explicit exclusion is not helpful for two reasons: (1) in Myanmar the registration comes at the very end of a sometimes lengthy and often costly process of investment application, during which the investor could definitely use international protection; and (2) the condition of “concrete steps” is itself not very concrete, and raises questions, particularly in the case of investments through loans and licenses of technology.
To illustrate the first point, take the example of a Japanese investor who signs a binding framework agreement with the Myanmar Government for the development of a power plant. The investor starts working on plans, financing and procurement. No application for a permit from the Myanmar Investment Commission is yet made, as the practice in Myanmar is that this can be done only when the Power Purchase Agreement has been executed. After a year of back and forth negotiating of the other agreements and after significant expenses are incurred by the investor, the Government drops the contract in favor of a domestic company. This could very well be a violation of the Myanmar-Japan BIT (particularly Art. 4(2), and possibly “National Treatment”), but the investor cannot invoke the Myanmar-Japan BIT except “when the investor has taken concrete steps [..] such as made an application for [..] a permit [...]”.
With respect to the second point, as the notion “concrete steps” is not defined, it will be the state’s first defense to argue that no such steps have been taken. This might be a real problem for intra-group cash advances and licenses of technology. For such types of investments, investors may often forget to obtain full official approvals, or it may be unclear whether they are indeed required. That uncertainty may come up in an actual arbitration case, casting a doubt over the investor’s protection.
Myanmar-Japan BIT includes umbrella clause
Art. 4(2) provides a so-called umbrella clause. This provision reads that:
Each Contracting Party shall observe any obligation it may have entered into with regard to investments and investment activities of investors of the other Contracting Party.
Under this provision, any violation of a contract by the Myanmar Government with a Japanese investor is ipso facto a violation of the Myanmar- Japan BIT. In other words, it lifts up any contract claim to the level of a claim based on an investment treaty. In practice, this means that when the Government has breached a business contract with a Japanese company, that Japanese company has two independent causes of action: (1) breach of contract - the company can start a proceeding under the dispute settlement clause of the contract, e.g. international commercial arbitration; or (2) breach of the BIT - the company can start an investor-state arbitration (“international mixed arbitration”) in accordance with Art. 18 of the Myanmar-Japan BIT.
Umbrella clauses are relatively common in international investment law and certainly very reassuring for investors.
Myanmar-Japan BIT will apply to pre-existing investments, but subject to conditions
It may take quite some time for the Myanmar- Japan BIT to enter into force. After all, we are still waiting for the ratification of the Myanmar-Laos BIT, which was signed in 2003. No doubt the Japanese Government will ask the Myanmar National Assembly to ratify the BIT as soon as possible, with the massive Thilawa Special Economic Zone project in mind.
Investments by Japanese investors in Myanmar that already exist at the time the Myanmar-Japan BIT enters into force are also covered by its protection as well as new investments going forward. This is explicitly provided for in Art. 28(3) of the BIT. It is required, though, that the investment is “made in in accordance with the applicable laws and regulations of that other Contracting Party prior to the entry into force of this Agreement”. It is unhelpful that this last specification was added for pre-existing investments. The condition does not exist for investments acquired after the entry into force of the Myanmar-Japan BIT. Myanmar’s laws and regulations are in certain areas quite unclear. If the Japanese investor has obtained a clear registration from the Myanmar Investment Commission, there should be no problem, but there are many legacy situations where this is not the case. In such scenarios, it would not be difficult for a Respondent State to claim that the condition “in accordance with laws and regulations” was not fulfilled.
Denial of benefits possible for Japanese companies with non-Japanese shareholders
It is not uncommon for investment treaties to provide that the host state may deny the benefits of the treaty in case the investor-company is not owned by nationals of the other contracting state. Likewise, Myanmar may deny the protection of the Myanmar-Japan BIT to a Japanese company if that company has non-Japanese shareholders, and if a number of additional conditions are met. Essentially, this is to prevent treaty-shopping by investors. A similar provision is found in the ASEAN Comprehensive Investment Agreement (ACIA), and in numerous BITs around the world.
Art. 26 of the Myanmar-Japan BIT provides that Myanmar may deny the protection of the BIT to a Japanese-registered company if such company is more than 50% owned or controlled by non- Japanese and if on top of that, the company has no substantial business operations in Japan.
Does the Myanmar-Japan BIT apply to construction contracts?
Suppose a Japanese company signs a construction agreement with a Myanmar Government agency to build, for example, a port terminal. If the Japanese company establishes a subsidiary in Myanmar, clearly the Myanmar- Japan BIT will apply to that investment. However, without establishing a subsidiary, the situation is less clear. Does the construction agreement itself fall under the protection of the Myanmar-Japan BIT?
There is extensive international case law with respect to the definition of “investment” as defined in the Myanmar-Japan BIT. Normally, a certain degree of risk, duration and a contribution is required to speak of an investment (see C. Schreuer’s overview of ICSID case law “ICSID Convention: A Commentary” (CUP, Cambridge 2000, 139-141).
Nevertheless, the monetary claims arising from the supply of a testing and certification service to a Government was deemed an “investment” (SGS Société Générale de Surveillance S.A. v. Pakistan, ICSID Case No. ARB/01/13, Decision on Objection to Jurisdiction, 6 August 2003; SGS Société Générale de Surveillance S.A. v. Philippines, ICSID Case No. ARB/02/6, Decision on Objection to Jurisdiction, 29 January 2004).
The definition of investment in the Myanmar- Japan BIT includes the same broad reference as in the SGS cases. Art. 1 (a) of the BIT includes as investment:
(iv) rights under contracts, including turnkey, construction, management, production or revenue-sharing contracts; (v) claims to money and to any performance under contract having a financial value;
It is quite clear to us that a construction contract itself does qualify as an investment under the Myanmar-Japan BIT. If the Japanese company uses a Myanmar subsidiary, there is no question it is entitled to protection. However, the note in Art. 1 (b) of the BIT casts some doubt on the application of the treaty, because the protection only applies if “concrete steps” have been taken with respect to the construction agreement.
For more information on this subject matter, contact: Edwin Vanderbruggen, Partner, VDB Loi firstname.lastname@example.org