International arbitration has not spared special economic zones (SEZs) in the past 20 years. Despite this, SEZ authorities have yet to fully grasp their duties under active bilateral investment treaties (BITs) between their countries and investment partners, says Julien Chaisse, law professor at the Chinese University of Hong Kong.

“The management of these zones should have some knowledge about their countries’ investment treaties, but have yet to catch up on this,” he says.

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Carrying the can

SEZs are being increasingly used by host countries across the globe to attract foreign investment by offering incentives that increase their appeal as an investment destination. They are often given a special legal status, management autonomy, and are sometimes even classed as a separate jurisdiction. However, under international law the respective state is still liable for the actions of SEZ authorities within its country, even if they acted in complete autonomy. Therefore changes in the privileges that are offered by an SEZ can trigger an investment claim against the host state.  

“Whatever occurs on a state’s territory is the responsibility of the state itself,” says Mr Chaisse. “Local governments, for example, do not have any existence under international law. This also applies to any public agency. And even when an SEZ is run by a private company, eventually it’s a state decision to delegate these powers, which makes the state liable for the company’s actions.”

Decisions by SEZ authorities have thus led foreign investors to sue host states for alleged breaches of investment protection provisions included in active BITs 11 times in past 20 years, according to known cases published by Unctad, although the number of undisclosed cases may be higher, according to Mr Chaisse.

Among others, Spanish company Albacora sued the Ecuadorian state in 2016 for allegedly denying its tax privileges as a user of the Posorja SEZ – a final decision by the UN Commission on International Trade Law’s arbitration tribunal is still pending. Back in 2011, Kuwaiti fertiliser company Bawabet filed an arbitration case against Egypt as it saw its free zone status cancelled – the parties eventually settled the case in 2016. Russian entrepreneur Iuri Bogdanov filed two arbitration cases before the Stockholm Chamber of Commerce against the Moldovan government in 2005 and 2009 for decisions by the authorities of the Chisinau SEZ to restrict the privileges originally granted to his business operating within the SEZ. Mr Bogdanov was awarded a $30,000 for the second case, but the details of the first are not known.

DIY arbitration

If SEZs are not immune to arbitration claims, their special jurisdiction rights often prompt local authorities to set up arbitration courts within the same SEZ in an attempt to prevent disputes form escalating and eventually ending up in the hands of international law firms and arbitration tribunals. Major SEZs such as the Dubai International Financial Centre or the Shenzhen Special Economic Zone feature an arbitration centre at the heart of the set of guarantees they offer to potential investors. Newer SEZs, such as the upcoming Astana International Financial Centre, also incorporate an arbitration court in their offer.

“Mechanisms within the SEZ to fix a possible dispute can prevent a foreign company to seek the advice of a third party that may have an interest in escalating the issue to international arbitration,” says Mr Chaisse. “The host state could try to avoid that through listening, negotiating, and through local arbitration. This is all part of what is called dispute prevention.”