China-Latin America Investment Disputes through the ESG Lens

30 January 2024
London International Disputes Week
China-Latin America Investment Disputes through the ESG Lens

Author: Alex Hao

  1. Introduction

After nearly two decades of cooperation and the development of the Belt and Road Initiative, China has emerged as the largest trading partner and a major source of foreign direct investment in Latin America and the Caribbean (the “LAC”). In 2022 alone, Chinese direct investment in the LAC had reached nearly $12 billion, accounting for approximately 9% of the total foreign direct investment in this region.

Chinese investment in the LAC historically concentrated on energy, mining, and infrastructure construction, while in recent years, this focus has diversified to include burgeoning industries such as green energy and information technology. Despite the ongoing evolution in investment portfolios, concerns persist from the Environmental, Social, and Governance (“ESG”) perspectives.

In February 2023, an association of nongovernmental organizations presented a report to the United Nations Committee on Economic, Social and Cultural Rights, highlighting concerns regarding the violations of environmental and social standards by Chinese investors in Latin America’s infrastructure, energy, and extractive sectors. In Argentina, local environmental groups have voiced protests against the Santa Cruz River dam, funded by China Gezhouba Group Company, claiming the project will adversely impact nearby glaciers. The communal conflict also arose in Lithium exploitation in Salar de Oroz-Cauchari, Argentina, where Chinese Ganfeng Lithium Co. was involved.

ESG-related conflicts have led to controversies, protests, and even legal proceedings, resulting in project suspension. In early 2022, a Chilean court suspended a tender rendered to a Chinese lithium investor following an appeal from indigenous communities. In the same year, Chinese investor Junefield initiated an ad hoc arbitration against Ecuador, in which the dispute stemmed from opposition by the indigenous community.

  1. Junefield v. Ecuador (2022)

In 2022, a Chinese company, Junefield Gold Investments Limited (“Junefield”), filed an ad hoc arbitration against Ecuador, alleging that the Ecuadorian government violated the China-Ecuador BIT (1994) (“the BIT” in this section) by suspending its mining project, claiming for 480 million USD as compensation.

The underlying dispute arose from the conflicts between Junefield and local indigenous communities in 2018, where Ecuador’s local communities filed a lawsuit against Junefield for violating their rights to prior consultation before launching the mining project. The Ecuadorian court ruled in favor of local communities and has suspended Junefield’s mining project since 2018. Subsequently, a group of local people took over Junefield’s mine and conducted illicit mining operations. However, the Ecuadorian government did not effectively intervene to protect Junefield’s investments. In 2022, Junefield initiated an ad hoc arbitration against Ecuador, claiming that Ecuador’s suspension of its mining project constituted indirect expropriation under the BIT.

While the case remains pending, it is expected that the relevant provisions will be Paragraphs 1 and 2 of Article 4 of the BIT. Two issues will probably arise: (1) whether Ecuador’s suspension of Junefield’s mining project constitutes an indirect expropriation under Article 4(1); and (2) if an indirect expropriation were to be found, what amount of compensation will be adequate under Article 4(2).[1]

Since the BIT does not give a specific definition of indirect expropriation, international law may be introduced to supplement its interpretation. It is established that the key element of an indirect expropriation is “the substantial loss of control or economic value of a foreign investment without a physical taking” and the attribution of the government’s conduct to the investors’ loss, “whether malfeasance, misfeasance or nonfeasance or some combination of the three,” may also be considered.[2]

Based on the facts disclosed at the current stage, Junefield may rely on two facts in establishing the indirect expropriation: first, Ecuador’s suspension of its mining operations has substantially neutralized its financial benefits in the mine; and second, the Ecuadorian government failed to mitigate Junefield’s financial loss in its investments for it failed to take effective measures to halt local communities’ illegal mining operations in Junefield’s mine.

In defense, Ecuador may argue that under China-Ecuador BIT, the suspension of Junefield’s mining project was “in the public interest” since it was intended to protect local communities’ rights to prior consultation. In addition, it was ordered by the local court “under the domestic legal procedure” and on a “non-discriminatory” basis. If Ecuador were also to establish “fair compensation” in exchange for the suspension, it may be justified under Article 4(1) of the BIT.

  • Insights

Junefield v. Ecuador offers valuable insights for investors. Currently, there are 15 BITs and Treaties with investment provisions in force between China and the LAC. Notably, many Chinese projects in the LAC are located in environmentally sensitive areas with a substantial presence of indigenous or local communities.For investors, a thorough investigation of local ESG policies, relevant consultation process, and requirements for social license appears to be indispensable in minimizing resistance to the operation of projects.

On the other hand, stakeholders must remain vigilant towards the dynamic landscape of national policies. In pursuit of sustainable development, governments may frequently introduce new changes or implement multiple amendments simultaneously to laws and regulations related to ESG issues. Such as in May 2023, the Mexican government published several amendments to the Mining Law, the National Waters Law, the General Law of Ecological Balance and Environmental Protection, and the General Law for the Prevention and Integral Management of Waste regarding the mining industry, which also introduced a new obligation to create and implement a Restoration, Closure, and Post-Closure Program for mining activities. Regarding dispute resolution in particular,  many European countries are struggling with damages arising from the Energy Charter Treaty, for which this predicament has incentivized relevant countries to seek possibilities to modify, substitute, or even remove the Investor-State Dispute Settlement Mechanism embedded in the BITs. Investors need to pay attention to ESG-related policies, and the changes in international dispute resolution mechanisms that might substantially influence their right to claim for compensation.


Alex Hao

Alex is a partner at JunHe’s New York office and has been practicing law in New York since 2003.

He has significant experience in cross-border business transactions and proceedings involving China. He also acts as outside general counsel to significant Chinese clients doing business in the U.S. and connects them with U.S. partners and professionals.

Alex frequently speaks and writes on China-related legal and business issues. A fellow of the American Bar Foundation, he is an adjunct professor at Fudan University’s Fanhai International School of Finance in Shanghai, and co-chairs Practising Law Institute’s annual seminar on Doing Business in and with Emerging Markets in New York. Alex reads history avidly, studies Spanish and German, and travels the continents.

[1] See China-Ecuador Bilateral Investment Treaties, art. 4(2) (Mar. 21, 1994) (entered into force on Jul. 1, 1997).

[2] Patrick M. Norton, China’s Belt and Road Initiative: Challenges for Arbitration in Asia, 13 U. Pa. Asian L. Rev., at 5 (2018) (quoting CME v. The Czech Republic, Partial Award, ¶ 604 (Sep. 13, 2001))