For Taiwanese companies and investors, China has been a double-edged sword. Investments in the mainland are vital for growth, but the uncertainty surrounding legal rights in disputes has led several Taiwanese parties to reconsider their dealings in the country. The signing of a new investor protection agreement between Beijing and Taipei, however, lays out avenues for resolving disputes between Taiwanese investors and Chinese entities, which should instil confidence into Taiwanese cross strait investors. But questions still linger as to how China will implement and enforce the agreement.

A positive stride

After two years of difficult negotiations, Beijing and Taipei signed the Cross-strait Bilateral Investment Protection and Promotion Agreement on Aug. 9, 2012. It is the first key pact signed since the landmark cross-strait Economic Cooperation Framework Agreement, which took effect on Jan. 1, 2011. And the agreement should act as a catalyst for further cross-strait business and investment.

The pact offers a framework for Taiwanese investors to take up disputes with a local government on the mainland, while providing safeguards for investors that are commonplace in investment treaties elsewhere. This includes protection against expropriation. The agreement also broadens the scope of protection to those investing in China or Taiwan indirectly via a third country.

“It is a positive move for both sides. The pact helps investors on both sides enjoy more legal protection, particularly Taiwanese investors,” says Nigel Li, partner at Lee and Li and chairman of the Chinese Arbitration Association in Taipei. “A semi-governmental platform has been established which will allow investors who encounter legal problems to have a place to voice their concerns and complaints, and find a better solution than before the signing of the pact.”

To help protect the rights of Taiwanese investors on the mainland, the agreement introduces a mechanism to solve private-to-private (P2P) and private-to-government (P2G) disputes.

The key features of the agreement are that it recognises that P2G or investment disputes can be referred to mediation by institutions in both Taiwan and China, and that P2P commercial disputes can be referred to arbitration institutions in both countries, says Lillian Chu, partner at Tsar & Tsai Law Firm in Taiwan. In the past, only Chinese institutions could handle arbitration for P2P commercial disputes, Chu adds.

“The existence of this agreement will encourage people and enterprises to utilise those existing arbitration mechanisms,” adds Hsiaoling Fan, a partner at Formosa Transnational, a Taiwanese law firm.

The agreement states the arbitral awards in China or Taiwan are enforceable in each other’s jurisdiction. Private parties involved in commercial disputes could agree upon the arbitration venue, arbitration mechanism and the arbitrator. These types of commercial disputes were often arbitrated in third-party jurisdictions like Hong Kong, Singapore and even Sweden, says Fan.

While commercial disputes have long been resolved in international jurisdictions, the lines become blurred when it comes to P2G disputes. The use of third-party arbitration venues to tackle P2G disputes was a hotly debated issue that the Taiwanese business community had demanded to be permitted in the agreement. Despite the progress of cross strait relations between China and Taiwan, political sensitivities do remain. As a result, the agreement does not incorporate international arbitration as a dispute resolution mechanism for P2G and investment compensation disputes.

An alternative method

However, the agreement does introduce mediation as a resolution method for investment compensation disputes arising from cross-strait investments. The pact states that mediation proceedings will be private unless otherwise agreed by the disputing parties, and will be handled by arbitration institutions and mediation centres, though a list of which institutions will be used has not yet been provided.

The agreement specifically provides mediation for P2G disputes for expropriation. On the other hand, mediation has always been an available approach for P2P disputes, says Li. He adds that there is a different legal significance of mediation as a mechanism under the laws of both countries. In Taiwan, successful mediation by courts or by an arbitrator carries legal force and an enforceable result as a court decision. China’s new mediation law was just passed last year, and mediation has not yet been widely accepted by the courts as an equivalent to litigation. “The PRC courts will only recognise and enforce mediation settlements if it is conducted by court, or has been approved by courts. There is a gap between the laws of both sides, but this issue has not been covered in this pact,” says Li.

A matter of enforcement

Other concerns remain. While both parties have shown good faith developing cross-strait relations, many in the legal and business communities wonder how Beijing will implement the agreement, especially when it comes down to enforcing arbitral and mediation awards for disputes.

As it stands, arbitral awards are enforceable in both China and Taiwan, but mediation still remains a grey area. Since mediation is deemed a private agreement, the question is how both jurisdictions will enforce agreements achieved via mediation. In Taiwan, a provision under its current arbitration law states that only mediated agreements conducted by a certified arbitrator is directly enforceable. “If we want to make these cross-strait P2P mediation mechanisms work, we should get one of the Taiwanese-certified arbitrators involved. We need to figure out what the requirement is for private agreements via mediation to be enforced without complicated procedures in China and Taiwan. That is what arbitration associations across the strait are working on,” says Fan.

“Taiwanese investors can expect to see a procedure where a private organisation or institute participates in the mediation process. That will give a lot of people confidence,” adds Chu.

A handy tool

Renewed investor confidence, coupled with greater public awareness, may translate into more cross strait disputes going to arbitration or mediation. Many lawyers have observed that arbitration is becoming an increasingly useful tool for Taiwanese companies, partly due to their aversion to litigate in China. Although awareness is picking up in Taiwan, Chu states that not many cross strait commercial disputes go to arbitration, which leaves a lot of room for arbitration to develop.

“Unfortunately, arbitration is not a mechanism well known to Taiwanese business communities, particularly for small and medium-sized businesses. Of course, multinationals with good legal departments are aware of the benefit of adopting arbitration as a mechanism. But the signing of this pact provides an opportunity to really promote arbitration or alternative dispute resolution,” says Li.

Getting involved

Reinvigorated confidence for Taiwanese companies and investors and closer cross strait economic ties are likely to create work opportunities for private practitioners in the region. Besides the general corporate and finance arms of law firms, the dispute resolution practices also stand to benefit. Li believes the pact will prompt companies to adopt more arbitration clauses in their contracts, and expects to see more arbitration cases in Taiwan over the next few years. “Practitioners, including arbitrators and lawyers, will have more opportunities to be involved in the process. The number of cases has not been that big, but in the future, with greater public awareness particularly in the Taiwanese business community, that situation may change,” says Li.

Although signed by both sides, the agreement is still pending legislative approval in Taiwan. But many lawyers expect this internal process to be completed before the end of the year. Once the pact takes effect, Beijing and Taipei will start to exchange a list of arbitration and mediation institutions to oversee the new dispute resolution mechanisms stipulated.

A future of opportunities

The investment protection agreement is a positive step in the safeguarding of cross strait investors’ rights, while encouraging and creating a healthier investment environment. Where cross-strait investors would have once encountered problems with other private parties or local authorities, formal mechanisms are now in place to offer a platform to resolve disputes. While the question remains as to how the agreement will work in practice, cross strait investors are likely to be encouraged by the greater clarity provided, and the prospects of closer economic cooperation between China and Taiwan for years to come. Tsar & Tsai’s Chu summarises: “The fact that is has been put in writing in the agreement is already great progress between the two sides.”

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