State Responsibility for National Judicial Decisions in Investment Arbitration: Lessons China Can Learn

As a party to over 100 bilateral investment treaties, it is important for China to evaluate its exposure to state liability from domestic court decisions related to investment treaty arbitration in order to mitigate its risk of state liability in such cases and ultimately to improve China’s investment environment. Investment treaty arbitration jurisprudence shows that many investment tribunals subject domestic court decisions to substantive review and attach liability to those court decisions. This substantive review approach is, in fact, separate from the deferential approach generally adopted by other international tribunals and is rooted in the concept of “substantive denial of justice.” However, the basis of state responsibility triggered by national court decisions should not be the substance of the decisions, but rather the way the national courts handle the substantive materials of the cases, e.g., bias, discrimination, arbitrariness or bad faith on the part of the court. Intervention in domestic judicial decisions by investment tribunals should be launched only on the condition that the foreign investor has satisfied the burden of proof to produce convincing evidence of one of these elements. The concept of “substantive denial of justice” is misleading and should be abandoned in international investment arbitration. Meanwhile, it is equally important that China realizes and responds to issues presented in investment arbitration case law and its domestic legal practice, which may increase its exposure to state responsibility under investment treaties. Insufficient reasoning in Chinese court decisions is worth particular attention, especially when the decision declines recognition and enforcement of a foreign-related or foreign arbitral award. Lack of sufficient reasoning may serve as a strong indication of abusive misconduct, arbitrariness, or even bad faith on the part of the court, which may contribute to a finding of state liability. Furthermore, in addition to a denial of justice—a traditional standard for state responsibility involving judicial acts—case law shows that investment tribunals also access responsibility issues under other standards, such as the fair and equitable treatment (FET) standard and the full protection and security (FPS) standard, even under the principle of prohibition of expropriation. China should be alert to the possibility that its court decisions also trigger state responsibility under these less demanding standards and should make efforts to ensure its national law and the legal practice of Chinese courts are in conformity with its treaty obligations.