China has long been a magnet for foreign investment, but it is also starting to attract some lawsuits from unhappy foreign investors. In November 2014, a South Korean firm, Ansung Housing, lodged a formal arbitration complaint against China at the World Bank's International Centre for Settlement of Investment Disputes (ICSID).

According to information provided by the investor's lawyers, the dispute relates to a development project for a golf country club and condominiums in Sheyang-Xian, Jiangsu Province. The investor blames the local Sheyang-Xian government for a series of actions that frustrated its business plan, and the firm professes to have suffered at least $16m US in damages.

Advertisement

The company hopes that a panel of arbitrators will side with it, and find that China breached the protective guarantees contained in a bilateral investment treaty between the two countries. It is this bilateral treaty that permits jilted South Korean investors to drag China before an international tribunal, rather than have to fight out their battles in the Chinese legal system.

In financial terms, the South Korean case is miniscule. However, it may be the start of a trend.

Several years ago, the first case to be brought against China at the Washington, DC-based ICSID was launched by a Malaysian firm, Ekran Bhd. That investor complained that it had been wrongly stripped of rights to extensive landholdings in China's Hainan province.

After filing the case, the company agreed to negotiate with China, and the arbitration was suspended and never pursued further. The parties never announced a formal settlement, but it has been widely presumed that they reached one – and the ICSID case was quietly withdrawn in mid-2013.

It remains to be seen if Ansung will take a similar conciliatory tack in its dispute with China. However, what is already clear is that investors are no longer shy about brandishing the 'stick' of World Bank arbitration in order to get the attention of Chinese authorities. For decades, Beijing negotiated rafts of bilateral investment treaties with countries around the world. But, for a long time, foreign investors never publicly invoked those agreements when they became entangled in political or legal controversies in China.

That appears to be changing – and more legal cases could emerge down the road. China recently finalized an investment protection treaty with Canada, and a broad trade and investment agreement with Australia was also announced in November 2014. If investors hailing from those countries find themselves embroiled in future disputes, they may well turn to these new treaties in order to sue China on the international playing field.

Advertisement

Luke Eric Peterson is the publisher of InvestmentArbitrationReporter.com, a news and analysis service focused on investor-state dispute settlement.

Find out more about