22 October 2020
Jersey's BIT with the UAE and reflections on investment treaty practice in non-sovereign autonomous regions
A treaty is defined as 'a written agreement between two or more countries'. This is not necessarily correct. Non-sovereign autonomous regions like Hong Kong can enter into bilateral investment treaties (BITs) too. Essentially, a BIT is an international agreement where the governments of two territories mutually agree to treat individuals and legal persons (like companies) from one territory who invest in the other territory fairly. Pre-1997, Hong Kong did so with the authorisation of UK, the then-colonial power. Presently, in line with Hong Kong’s constitutional arrangements, the central Chinese government may empower the Hong Kong authorities to do so.
Most recently, Jersey has joined Hong Kong as another non-sovereign entity that negotiates its own BITs. Jersey is set to sign its first BIT with the UAE later this year.
With many autonomous regions, there are various factors that may result in a desire to adopt different policy goals from their sovereign state. These could be part of a broader desire for political independence or self-determination. On other occasions, there could be specific instances where the interests of the sovereign state and the autonomous region simply diverge on a practical level.
For Jersey, there is some sentiment that the interests of Jersey and the UK may not always align overseas. This has been recognised by the UK government, whose current stated policy is to only act on behalf of Jersey internationally following proper consultation, which sits alongside its commitment to supporting Jersey in developing its global identity. Given the nature of the economies of offshore financial centres like Jersey, one area where this has manifested is taxation. Jersey currently has 15 full double taxation agreements in force, separate from any equivalent UK-negotiated agreements.
With British support, Jersey has therefore sought to further develop its international legal personality by negotiating its own BITs, the Jersey-UAE BIT perhaps being the first of many similar agreements. As reflected in the UK’s model BIT, Jersey is otherwise dependent on the UK in this field, having to request that existing UK BITs be extended to Jersey by an exchange of notes. Presently, only about a third of the UK’s BITs have been extended to crown dependencies like Jersey. This remains the primary way by which Jersey participates in BITs. Further, certain UK BITs with larger economies like China do not apply to Jersey.
While the Jersey-UAE BIT has yet to be signed, it is likely to mirror the existing UAE-UK BIT, which has not been extended to Jersey. It might contain additional terms relating to the financial services sector, a key pillar of the Jersey economy.
Implications for sovereign state
An under-explored question in respect of investment treaties signed by non-sovereign entities is whether an investor can make a claim against the sovereign state rather than the autonomous region for breach of the treaty. Presumably, China and the UK would have deeper pockets than Hong Kong or Jersey.
Under the Articles on Responsibility of States for Internationally Wrongful Acts (Articles on State Responsibility), which have been widely accepted and applied by investment treaty arbitral tribunals, a state will be responsible for an internationally wrongful act even if the act complained of was done by an organ of 'a territorial unit of the state', rather than the central government. Notably, the Commentary to the Articles on State Responsibility prescribes a broad interpretation to the ambit of state organs.
Therefore, investors who believe their rights under BITs entered into by autonomous regions have been infringed may, in general, bring their claim against either the sovereign state or the autonomous region. Between the two, there ought to be joint and several primary liability. This would accord with the unitary view of the state generally taken in international law.
Particularly, for territories like Hong Kong and Jersey which have some internal autonomy, paragraph 9 of the Commentary states that 'it does not matter for this purpose whether the territorial unit in question is a component unit of a federal state or a specific autonomous area', state responsibility cannot be denied 'even in cases where the federal constitution denies the central government the right of control over the separate states'. As such, China and the UK would remain responsible for the acts of Hong Kong and Jersey respectively, unless the other contracting party has specifically agreed to limit their recourse to the non-state entity only.
Enforcement of awards under treaties with non-sovereign entities
It is further noted that the treaties signed by Hong Kong preclude the possibility of International Centre for Settlement of Investment Disputes (ICSID) arbitration. This is understandable as Hong Kong is not a contracting state within ICSID’s jurisdiction under article 25 of the ICSID Convention. While Hong Kong could come within ICSID jurisdiction as a designated entity under article 25(3) of the ICSID Convention, this is not an option which was chosen. It remains to be seen which arbitral institution rules will be included in the new Jersey-UAE BIT.
One of the main practical consequences of whether ICSID arbitration is an option for investors is whether an investor can rely on article 54 of the ICSID Convention in enforcing an award in its favour. Briefly, article 54 of the ICSID Convention requires contracting states to enforce an ICSID award as if it were a final judgment of a court in that state. There are no grounds under the ICSID Convention to resist enforcement of an ICSID award. By contrast, for non-ICSID awards, a successful investor will have to rely on the New York Convention or local legislation for enforcement of the award, which may allow a respondent state to resist enforcement of the award.
For investors and their advisers, developments like the Jersey-UAE BIT represent new opportunities. As with all investment treaties, particular attention must be paid to the peculiarities of the treaty. While we wait for the reveal of how the Jersey-UAE BIT has actually been drafted, this is an area to watch.
Christopher Tan co-authored this article with Christina Liew of Withersworldwide. An original version of this article was first published by Practical Law Arbitration, October 2020.
© Carey Olsen 2020.