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Analysis: As Huawei invokes investment treaty protections in relation to 5G network security controversy, what scope is there for claims under Chinese treaties with Czech Republic, Canada, Australia and New Zealand?

One of China’s largest private companies, the telecoms firm Huawei, has warned the Czech Republic of potential international arbitration in relation to assertions by a Czech government agency that Huawei’s technologies and equipment pose a security threat.

The arbitral threat was revealed on Friday by Czech media outlet Denik N.

The report quoted from a letter sent by Huawei’s Czech subsidiary earlier this month to the Czech National Cyber ​​and Information Security Authority (NUKIB) and also copied to the Czech Prime Minister.  The letter referenced unnamed Huawei’s “external legal advisors”, but was signed by local executive Radoslaw Kedzia.

In excerpts of the letter reprinted by Denik N, Huawei complained that a December 2018 report by NUKIB appeared to deem the Chinese company to be a security threat merely because of its country of origin (and the prospect of the company’s technology being exploited by Chinese state intelligence). Huawei also contended that NUKIB did not cite other evidence for any threat, and did not consider the steps that Huawei takes to guard against state interference and exploitation of its technology and equipment.

The company complains that the NUKIB report – which reportedly obliges Czech companies in sensitive sectors to weigh the risks – has harmed the company’s business and reputation in the Czech market already.

Huawei also warns of reputational harm in other markets

Of particular interest, the letter sent by Huawei to Czech officials also complained that NUKIB’s actions have harmed Huawei’s prospects in other jurisdictions.

Readers of our reports will know that claims for loss of reputation (which may focus on a claimant’s international reputation) rarely succeed in reported investment cases (see, for instance, here, here, here, and here), although one set of claimants succeeded to the hilt in a notorious case against Libya, netting $30 million in moral damages for harm to their international reputation (and another $900 million in lost profits for a resort project that never got off the ground).

Current version of China-Czech Republic BIT has no general security exception, thus departing from wording of earlier BIT between the two countries

Notably, the Czech Republic-China BIT was redrafted in the 2000s, removing a security exception that might have offered the Czech Republic some added defence against certain investor claims.

A protocol to the original China-Czech Republic BIT, which was in force from 1992 to 2006, read as follows:

“For the purpose of the provisions of paragraph 2 of Article 3 of the Agreement, it shall not be deemed ’treatment less favourable’ for either Contracting Party to accord discriminatory treatment, in accordance with its applicable laws and regulations, to investors of the other Contracting Party, in case it is really necessary for the reason of public order, national security or priority in the sound development of national economy.”

However, no similar provision appeared in the BIT that replaced the 1992 treaty, and which still remains in force according to UN data.

While the threat against the Czech Republic is the first concrete proof that Huawei is invoking its investment treaty protections, a growing number of countries, including Australia, New Zealand and the United States, have already closed the doors on Huawei involvement in building out national 5G networks. Meanwhile, frictions have been the highest in Canada, where a national security review of Huawei’s role in a future 5G network is currently in motion.

Since Canada, Australia and New Zealand all have investment treaty protections in force with China, we offer a preliminary overview of the scope of those respective obligations below.

Canada BIT carves out national security reviews if done pursuant to country’s foreign investment screening legislation

Notably, tensions in Canada with Huawei have reached such a level that China itself has threatened unspecified “repercussions” for the Government of Canada if an ongoing national security review should lead to the exclusion of Huawei from the looming build-out of a 5G mobile network.*

(Canada has, of course, been a particular subject of Chinese official anger due to the detention of Huawei executive Meng Wanzhou in December, following a request by U.S. law enforcement.)

While China has made vague threats on behalf of Huawei, it’s unclear if Huawei itself has threatened Canada with a claim under the Canada-China bilateral investment treaty that entered into force in 2014.

That treaty provides that an investor must file a Notice of Intent as a preliminary step to pursuing arbitration. Canada does not systematically (or promptly) disclose when such threats have been made. (For instance, the first news of a recent Notice of Intent filed by a US coal company against Canada under NAFTA came when the company itself publicized its case – after having quietly lodged its Notice of Intent three months earlier.)

While Huawei may have already made Canadian officials aware that it might pursue BIT arbitration, it would be surprising if a formal Notice of Intent has been lodged already – particularly since a security review remains ongoing.

In the event that Canada were to exclude Huawei from its 5G plans after the conclusion of this review, the viability of any investor claim might differ dramatically depending on the nature of the review that led to the key decision.

If the review is bring taken under the auspices of the Investment Canada Act (ICA), the Canada-China BIT carves out from its investor-state dispute settlement mechanism ICA decisions with respect to approval of an investment (and whether they offer a “net benefit” to Canada) and decisions whether to permit an investment on national security grounds. However, if the review currently being undertaken in Canada is not pursuant to the Investment Canada Act (ICA), there might be broad scope for a BIT claim.**

Huawei appears to have significant investments in Canada already, thus seemingly giving it standing to bring a claim in relation to adverse measures (other than decisions under the ICA). Moreover, the Canada-China BIT contains no broad “security” exception like those seen in some treaties. Thus, Canada does not have an explicit foothold for mounting the type of “essential security interest” defence that was made, for example, in a pair of recent BIT claims against India that touched on telecoms investments and measures that were purportedly introduced for national security reasons.

Australia-China FTA offers only a narrow path to arbitration, and also shelters screening decisions

Australia’s FTA with China also carves out decisions made by its investment screening board from review under investor-state arbitration.

Even if the measures could be subject to an ISDS claim, the FTA only allows for claims for breach of the national treatment obligation to be arbitrated by investors.

Furthermore, another obstacle might arise for Huawei because the investment obligations in the Australia-China FTA do not apply to procurement or to measures covered by the FTA’s chapter on trade in services. To the extent that Huawei’s intended activities constituted procurement by Australia, or Australia’s measures related perhaps to installation, setup and maintenance services for 5G equipment rather than purely provision of equipment, an investor-state claim would face further difficulties.

If Huawei were able to mount at least a national treatment claim, it would be somewhat comforted by the fact that the FTA lacks a broad “essential security” exception. Although the FTA incorporates the GATS Art XIV bis security exception by reference, the exception is limited to situations of war or ‘other emergency in international relations’, nuclear technology, military establishments, or actions under the UN Charter to maintain international peace and security.

A claim against Australia under the 1988 Australia-China BIT may also be possible, since that treaty continues to exist alongside the Australia-China FTA. The BIT appears to limit investor-state claims to disputes relating to the amount of compensation payable for expropriation, to be heard in ad hoc arbitration, which may not be useful to Huawei.

However, the treaty contains a separate clause offering the two parties’ consent to ICSID arbitration, without clearly specifying which disputes may be submitted to ICSID. This has led commentators to argue that the BIT permits investor claims at ICSID for all the treaty’s substantive obligations, relevantly including MFN, FET and unreasonable or discriminatory measures (the latter ‘without prejudice to [the host state’s] law’). Furthermore, the treaty does not contain any security exception, thus leaving Australia open most likely to a claim of breach of MFN or FET from Huawei under the BIT.

New Zealand-China has two treaties, with different options 

New Zealand also maintains both a BIT and an FTA with China. New Zealand’s BIT, however, limits investor-state claims to disputes over the amount of expropriation, thus potentially being less useful for Huawei if a ban on the company’s future 5G involvement does not interfere with its existing business in New Zealand.

The New Zealand-China FTA, meanwhile, permits investor-state claims for all the typical obligations, but (like the Australian FTA) does not apply to procurement. New Zealand’s FTA exempts measures affecting trade in services, like its Australian counterpart, but also provides that services provided in New Zealand via a commercial presence are subject to the FET, expropriation and unreasonable or discriminatory measures obligations – leaving a window open for a discrimination claim where Huawei’s 5G activities are characterised as services.

The FTA contains a security exception, but like the Australia FTA it is limited to defined categories of ‘essential security interests’, none of which may capture New Zealand’s concerns.

 

* In a statement reported in the Globe and Mail newspaper in mid-January of this year, China’s ambassador to Canada reportedly said: “I hope Canadian officials and relevant authorities and bodies will make a wise decision on this issue. But if the Canadian government does ban Huawei from participating in the 5G networks … I believe there will be repercussions”.

** [UPDATE, Feb 11, 2019: We have added this note – as well as the first sentence in the paragraph to which this note corresponds – after the original article was published, so as to clarify further that despite wall-to-wall media coverage in Canada of the Huawei controversy it’s unclear whether the currently-pending national security review is being conducted under the auspices of Canada’s foreign investment screening legislation.]