The (provisional) end of debates on narrow dispute settlement clauses in PRC first-generation BITs?—China Heilongjiang et al v Mongolia

The (provisional) end of debates on narrow dispute settlement clauses in PRC first-generation... ABSTRACT To this day, arbitral tribunals constituted under international investment treaties (investment treaty tribunals) only dealt with a handful of investor–state arbitrations relating to Chinese investors abroad. In 2010, China Heilongjiang International Economic & Technical Cooperative Corporation, Beijing Shougang Mining Investment Company Ltd. and Qinhuangdaoshi Qinlong International Industrial Co. Ltd.—three companies incorporated in the People’s Republic of China (PRC) (the Claimants)—relied on the 1991 bilateral investment treaty (BIT) concluded between the PRC and Mongolia (the PRC–Mongolia BIT) to bring an expropriation claim against Mongolia for its cancellation of mining licenses held by the Claimants in the Tumurtei iron ore mine in the North of Mongolia. The UNCITRAL tribunal (the Tribunal) in China Heilongjiang et al v Mongolia (China Heilongjiang) rendered an award on 30 June 2017 (the Award) rejecting the Claimants’ claim for lack of jurisdiction ratione materiae under the narrow dispute settlement clause in the PRC–Mongolia BIT. The Tribunal decided diametrically opposed to two previous investment treaty tribunals that had to address the same interpretative question with regard to identically worded narrow dispute settlement clauses in two other ‘first-generation BITs’ of the PRC. The Tribunal also deviated from findings by national courts that were sitting in proceedings to set-aside an award rendered by one of these earlier tribunals. This case report deals with the current state of case-law relating to the application of narrow dispute settlement clauses in PRC first-generation BITs and addresses the question of whether the most recent decision in China Heilongjiang points to an end of interpretative debates that are existing in this respect. 1. INTRODUCTION Bilateral investment treaties (BITs) seek to promote and protect in- and outbound foreign investments by providing substantive protection standards such as relating to the protection against illegal expropriations, the enforcement of which is usually secured by a dispute settlement clause in the BIT allowing a foreign investor to initiate an international investor–state arbitration against the host state. The People’s Republic of China (PRC) started concluding BITs during the 1980s. Many of the PRC’s ‘first-generation BITs’ are still operating1 and of high relevance in light of steadily growing investment flows from and into the PRC. The PRC’s first-generation BITs are characterized by a remarkably narrow inter-state consent to the settlement of investor–state disputes arising under these BITs by international arbitration. Such a narrow state consent to arbitration can be found in the dispute settlement clause in Article 8 of the 1991 PRC–Mongolia BIT,2 which reads as follows: Any dispute between an investor of one Contracting State and the other Contracting State in connection with an investment in the territory of the other Contracting State shall as far as possible be settled amicably through negotiations between the parties to the dispute. If the dispute cannot be settled through negotiations within six months, either party to the dispute shall be entitled to submit the dispute to the competent court of the Contracting State accepting the investment. If a dispute involving the amount of compensation for expropriation cannot be settled within six months after resorted to negotiations as specified in paragraph 1 of this Article, it may be submitted at the request of either party to an ad hoc arbitral tribunal. The provision of this paragraph shall not apply if the investor concerned has resorted to the procedure specified in the paragraph 2 of this Article.3 This and similar narrow dispute settlement clauses in other first-generation BITs of the PRC are particularly noteworthy for two reasons:4 first, the above Article 8(3) confines the jurisdiction of an arbitral tribunal to the issue of expropriation and excludes arbitration with respect to other substantive protection standards provided by the BIT.5 Secondly, Article 8(3) only refers to investor–state disputes ‘involving the amount of compensation’ in cases of expropriation.6 In China Heilongjiang et al v Mongolia (China Heilongjiang),7 the question arose whether this narrow investor–state arbitration offer by the treaty parties in Article 8(3) of the PRC–Mongolia BIT enables an arbitral tribunal to examine if an alleged expropriation of the Claimants’ investment by the host state has actually ‘occurred’. In recent years, the same legal issue was subject to two other investment cases: Tza Yap Shum v Peru and Sanum Investments v Laos. These cases were pending before two investment treaty tribunals that operated based on identically-worded narrow dispute settlement clauses in the Articles 8(1)–(3) of two other BITs of the PRC, one ad hoc annulment committee that was called upon by the respondent state to annul the award in Tza Yap Shum v Peru, and two national courts that had to decide in proceedings initiated by the respondent state to set aside the award in Sanum Investments v Laos, which was again rendered in favour of the claimant investor. In the following, this contribution explains the key findings in these earlier cases before it analyses the most recent decision in China Heilongjiang, which was rendered in favour of the respondent state. 2. THE APPLICATION OF NARROW DISPUTE SETTLEMENT CLAUSES IN PRC BITs IN EARLIER CASES 2.1 Tza Yap Shum v Peru 2.1.1 The ICSID tribunal The narrow type of dispute settlement clause in BITs of the PRC was interpreted for the first time in the case of (Señor) Tza Yap Shum v Peru.8 Based on Article 8(3) of the 1994 PRC–Peru BIT9 and the International Convention on the Settlement of Investment Disputes (ICSID Convention),10 the arbitration concerned claims arising out of the seizure of a bank account by Peruvian tax authorities that resulted in the deprivation of the claimant’s investment. Apart from the fact that Article 8 of the PRC–Peru BIT entitles to arbitration under the ICSID Convention, the provision has the same wording as Article 8 of the PRC–Mongolia BIT.11 The ICSID tribunal in Tza Yap Shum v Peru interpreted the narrow dispute settlement clause in Article 8 of the PRC–Peru BIT broadly and found that it has subject matter jurisdiction to examine whether Peru had actually expropriated the claimant’s investment. According to Article 31 of the Vienna Convention on the Law of Treaties (VCLT),12 the ICSID tribunal referred to the ‘ordinary meaning’ of the phrase ‘a dispute involving the amount of compensation for expropriation’ in Article 8(3) of the PRC–Peru BIT and read the term ‘involving’ broadly as meaning to ‘include’.13 Furthermore, in the tribunal’s view, the ‘context’ of Article 8(3) of the PRC–Peru BIT supports this reading. It referred to the BIT’s preamble and the treaty’s objective to promote mutual investments, which the parties to the PRC–Peru BIT presumably sought to achieve by providing investors with a right to submit certain disputes to ICSID arbitration.14 Against this background, the tribunal found that the term ‘a dispute involving the amount of compensation for expropriation’ in Article 8(3) of the PRC–Peru BIT must be interpreted to also include the legal issues usually arising in cases of expropriation;15 namely, whether the investor was actually expropriated and whether the expropriation occurred in accordance with the rules and requirements of the BIT.16 Additionally, the ICSID tribunal opined that if the question of whether and how an expropriation took place was indeed, as argued by the respondent state, a matter to be decided exclusively in the Peruvian national courts pursuant to Article 8(2) of the PRC–Peru BIT, investor–state arbitration relating to disputes over ‘the amount of compensation for expropriation’ would definitely be precluded because of the ‘fork-in-the-road provision’ in the last sentence of Article 8(3) of the PRC–Peru BIT, which makes an investor’s choice of dispute settlement in the host state’s national courts final,17 when it states that: 3. … The [arbitration] provisions of this Paragraph shall not apply if the investor concerned has resorted to the procedure specified in Paragraph 2 of this Article. Article 8(2) of the PRC–Peru BIT provides as follows: 2. If the dispute cannot be settled through negotiations within six months, either party to the dispute shall be entitled to submit the dispute to the competent court of the Contracting Party accepting the investment. 2.1.2 The ICSID ad hoc annulment committee Peru tried to annul the aforementioned decision on jurisdiction for a ‘manifest excess of powers’ by the ICSID tribunal pursuant to Article 52(1)(b) of the ICSID Convention.18 According to Peru, the ICSID tribunal ignored the narrow dispute settlement clause in the PRC–Peru BIT. The ICSID ad hoc annulment committee in Tza Yap Shum v Peru dismissed the annulment request. The committee noted at the outset ‘that there would not be a binding award in the meaning of … the ICSID Convention if an award could be annulled because the arbitral tribunal misinterpreted the language of the treaty.’19 In its view, a ‘misinterpretation of the arbitration clause [in a BIT] does not amount to a manifest excess of powers.’20 After assessing the decision’s reasoning, the annulment committee concluded that the ICSID tribunal in its interpretation of Article 8 of the PRC–Peru BIT and in its finding that the word ‘involving’ in Article 8(3) of that BIT is ambiguous did not manifestly exceed its powers.21 It highlighted that, on its face, the words ‘a dispute involving the amount of compensation for expropriation’ ‘do not include the question of the legality of expropriation, but equally do not refer to disputes exclusively limited to the amount of compensation’, and that out of context, ‘the meaning of the phrase is not textually obvious.’22 Furthermore, the annulment committee considered that the ICSID tribunal interpreted the disputed phrase in the overall context of Article 8 of the PRC–Peru BIT23 and that the tribunal underwent ‘an interpretative process mandated by the VCLT.’24 However, the ICSID ad hoc annulment committee also added that, unlike itself, a judicial body with appellate power might well find fault as a matter of law with certain aspects of the ICSID tribunal’s application of the VCLT in Tza Yap Shum v Peru.25 2.2 Sanum Investments v Laos 2.2.1 The UNCITRAL tribunal The second case in which the narrow type of dispute settlement clause in PRC’s BIT came under judicial scrutiny is Sanum Investments v Laos (Sanum v Laos).26 Filed as an ad hoc arbitration under the UNCITRAL Arbitration Rules by an investor from Macau27 and based on Article 8(3) of the 1993 PRC–Laos BIT,28 the case concerned a series of alleged state measures that affected the claimant’s investments in hotels and casinos in Laos. Article 8 of the PRC–Laos BIT provides the exact same wording as the narrow dispute settlement clause in Article 8 of the PRC–Mongolia BIT.29 The UNCITRAL tribunal in Sanum v Laos also construed its jurisdiction under the PRC–Laos BIT broadly and found itself empowered to decide whether an expropriation has occurred. Relying on the VCLT and referring to the case of Tza Yap Shum v Peru, the UNCITRAL tribunal in Sanum v Laos advanced two main arguments: first, the tribunal found that ‘[t]he term “involving” has a wider meaning than other possible terms such as “limited to” which could have been used if the intention of the State Parties had been to limit the jurisdiction of the Tribunal exclusively to disputes on the amount of compensation.’30 It also held that ‘“[t]o involve” means “to wrap”, “to include”, terms that are inclusive rather than exclusive’ and that ‘[t]his wider reading of Article 8(3) [of the PRC–Laos BIT] would seem more consistent with the other provisions of the Treaty.’31 Secondly, the UNCITRAL tribunal in Sanum v Laos considered the ‘context’ of the narrow dispute settlement clause in the PRC–Laos BIT as well as the fork-in-the-road provision in the last sentence of Article 8(3) of that BIT. Referring to the principle of effet utile, the tribunal found that a limitation of the dispute settlement clause to arbitration of disputes solely over the ‘amount of compensation for expropriation’ leaves, practically speaking, the first sentence of Article 8(3) without effect in light of the expropriation clause in Article 4(1) of the PRC–Laos BIT,32 which states that: 1. Neither Contracting State shall expropriate, nationalize or take similar measures … unless the following conditions are met: a. as necessitated by the public interest; b. in accordance with domestic legal procedures; c. without discrimination; d. against appropriate and effective compensation. The tribunal in Sanum v Laos held that ‘to establish whether an expropriation had taken place, a competent [national] court would need to decide whether the action of Laos meets the four conditions [above] … The fourth condition is “appropriate and effective compensation.”’33 Therefore, ‘if Articles 8 and Article 4(1) [of the PRC–Laos BIT] are read together, an investor who would have recourse to a competent [national] court to determine whether an expropriation has occurred would be precluded from submitting the dispute on the amount of compensation to international arbitration’ pursuant to the fork-in-the-road provision in the last sentence of Article 8(3) of the PRC–Laos BIT as a national court would already have determined the compensation.34 2.2.2 The High Court of Singapore Laos initiated proceedings to set aside the award on jurisdiction rendered in Sanum v Laos in the High Court of Singapore.35 The High Court rejected obiter the broad interpretation of the UNCITRAL tribunal in Sanum v Laos and found that the phrase ‘a dispute involving the amount of compensation’ in Article 8(3) of the PRC–Laos BIT ‘should be given a restrictive meaning, viz, disputes limited to the amount of compensation for expropriation.’36 In the High Court’s view, the word ‘involve’ is also capable of a restrictive interpretation to mean imply, entail or make necessary.37 Given the broad wording of the phrase ‘any dispute in connection with an investment’ in Article 8(1) of the PRC–Laos BIT, the court further suggested that a more restrictive meaning was intended for the term ‘a dispute involving the amount of compensation’ in Article 8(3) of that BIT.38 The High Court also considered that it is not correct to conclude that an investor would be precluded from arbitration if Article 8(3) of the PRC–Laos BIT was interpreted restrictively. An investor may initiate an arbitration if ‘the dispute remains unresolved after six months of negotiation’, ‘the dispute concerns the amount of compensation for expropriation’ and Article 8(2) of the PRC–Laos BIT ‘has not been invoked by the investor [as required by the fork-in-the-road provisions in last sentence of Article 8(3) of the BIT], ie, it may still be invoked if the State has invoked’ Article 8(2) of the BIT.39 Thus, from the investor’s perspective, the High Court of Singapore essentially limited the arbitration offer in Article 8(3) of the PRC–Laos BIT to cases in which it is undisputed that an expropriation occurred; that is, to cases of a direct or formal expropriation by the host state. Furthermore, while noting the ‘truism’ of the purpose of BITs to promote foreign investments, the High Court stated that ‘it does not follow from this general proposition that every ambiguity found in such treaties should invariably be resolved in favour of the investor.’40 Lastly, the High Court stressed the historic context of the PRC’s first-generation BITs. In its view, the limited scope of state consent to investor–state arbitration should be understood in light of the observation made in the case of Tza Yap Shum v Peru that communist regimes possessed a certain degree of distrust regarding foreign investments or private capital and were concerned about the decisions of international tribunals on matters over which they had no control.41 The High Court had no doubt that these concerns were present in the PRC–Laos BIT from 1993. It also emphasized that the PRC gradually extended its investor–state arbitration offers in its ‘second- and third-generation’ BITs, as concluded by the PRC from 1998 onwards. It exemplarily referred to the 2003 PRC–Germany BIT,42 which allows ‘any’ investor–state dispute to be arbitrated.43 Against this background, the High Court of Singapore concluded that ‘the shift from PRC’s “first-generation” BITs to “second generation” suggests that the PRC–Laos BIT which fell into the former category should be read restrictively.’44 2.2.3 The Court of Appeal of Singapore The claimant Sanum challenged the findings of the High Court of Singapore in the Court of Appeal of Singapore. The latter found that the High Court erred in its interpretation of the narrow dispute settlement clause in Article 8 of the PRC–Laos BIT.45 According to the Court of Appeal, the term ‘involving’ in Article 8(3) of the PRC–Laos BIT is capable of supporting both a broad and narrow interpretation and that thus the ‘ordinary meaning’ of the phrase will not help to interpret the dispute settlement clause.46 However, in the view of the Court of Appeal, a broad interpretation should apply to Article 8(3) of the PRC–Laos BIT ‘given the specific context surrounding’ that Article.47 In this respect, Laos opposed the view of the UNCITRAL tribunal in Sanum v Laos that a limitation of the dispute settlement clause to arbitration of disputes over the ‘amount of compensation for expropriation’ leaves, practically speaking, Article 8(3) of the PRC–Laos BIT without effect because of the expropriation clause in Article 4(1) and the fork-in-the-road provision in the last sentence of Article 8(3) of that BIT.48 Laos argued that one must distinguish between the expropriation issues of ‘liability’ of the host state on the one side and ‘quantum’ on the other. Laos further contended that a claimant such as Sanum could submit liability issues in relation to an alleged (indirect) expropriation to a national court while asking that court not to determine the appropriate amount of compensation (the ne ultra petita argument): ‘[i]n so doing, the claimant would remain free to have an arbitral tribunal determine the issue of compensation.’49 The Court of Appeal’s finding is mainly based on a rejection of Laos’ prior submission. In the court’s view, the words in the last sentence of Article 8(3) of the PRC–Laos BIT ‘the provisions of this paragraph shall not apply if the investor concerned has resorted to the procedure specified in paragraph 2’ mean that: [I]f any dispute is brought to the national court, the claimant will no longer be entitled to refer any aspect of that dispute to arbitration. Hence once an expropriation claim is referred to the national court, no aspect of that claim can then be brought to arbitration.50 The Court of Appeal further noted that the High Court of Singapore found that Article 8(3) of the PRC–Laos BIT only applies with respect to disputes over ‘the amount of compensation’ for expropriation although the High Court was mindful of the argument by the claimant Sanum that reducing Article 8(3) of the BIT to this (undisputed) scope of application ‘might denude the arbitration clause of [its practical] force’ as the question of whether an expropriation occurred is usually in dispute in today’s investment arbitration practice.51 According to the Court of Appeal, the narrow interpretation of the High Court must be rejected as, first, ‘direct’ expropriations (where only quantum is disputed) are becoming increasingly rare.52 In the Court of Appeal’s view, the High Court’s interpretation would imply that it is entirely open to the host state to avoid arbitration for ‘indirect’ expropriation by denying an alleged expropriatory act.53 In this case, however, the investor is required to ask a national court for a ruling that the host state had committed such an act and in so doing, it is barred from bringing a dispute on compensation to arbitration pursuant to the fork-in-the-road provision in the last sentence of Article 8(3) of the PRC–Laos BIT.54 The Court of Appeal cited the finding of the ICSID tribunal in Tza Yap Shum v Peru that this ‘would lead to an untenable conclusion— namely that the investor could never actually have access to arbitration’.55 Lastly, the Court of Appeal noted that its broad interpretation of the narrow dispute settlement clause in the PRC–Laos BIT is consistent with the treaty’s object and purpose of protecting mutual investments.56 The Court of Appeal restored the decision on jurisdiction rendered by the UNCITRAL tribunal in Sanum v Laos. 3. THE DECISION IN CHINA HEILONGJIANG Unlike the aforementioned judicial bodies with respect to their narrow dispute settlement clauses in the BITs between the PRC and Peru as well as the PRC and Laos (with the exception of the High Court of Singapore in the Sanum case), the Tribunal in China Heilongjiang reached the conclusion that it lacks jurisdiction ratione materiae under the narrow dispute settlement clause in Article 8(3) of the PRC–Mongolia BIT with regard to an examination of the legal issue of whether an expropriation of the Claimants by Mongolia has actually occurred.57 The Tribunal in China Heilongjiang pointed out that based on Article 8(2) of the PRC–Mongolia BIT the jurisdiction of a national court encompasses ‘all’ investor–state disputes concerning the host state’s compliance with its obligations under the BIT. This includes the host state’s duty with regard to Article 4(1) of the BIT not to subject an investment to measures of expropriation, except for the need of social and public interests and while respecting the obligations of non-discrimination and paying appropriate compensation without unreasonable delay.58 On the other hand, as recalled by the Tribunal, Article 8(3) of the PRC–Mongolia BIT only provides state consent to arbitrate ‘a dispute involving the amount of compensation for expropriation’.59 The Tribunal explained that for such a dispute ‘neither a court nor an ad hoc arbitral tribunal is given exclusive jurisdiction’ but that ‘[t]he investor has a choice’.60 However, once this choice has been made and a dispute involving the amount of compensation for expropriation is submitted to a national court, the jurisdiction of an arbitral tribunal is barred pursuant to the fork-in-the-road provision in the last sentence of Article 8(3) of the PRC–Mongolia BIT.61 Also the Tribunal in China Heilongjiang considered that interpreting the phrase ‘a dispute involving the amount of compensation for expropriation’ is the critical legal issue. As for the ‘ordinary meaning’ of this phrase, it agreed with the Court of Appeal of Singapore in the Sanum case, which had to interpret an identical provision in the PRC–Laos BIT, that the term ‘involve’ is capable of supporting either a broad or a narrow interpretation, and that Article 8(3) of the PRC–Mongolia BIT can thus only be accurately understood by considering the ‘context’ of that provision.62 The Tribunal stated that part of this context is the expropriation rule in Article 4 of the PRC–Mongolia BIT.63 It recalled that other judicial bodies have examined PRC BITs that are substantially similar and that: These tribunals and the Court of Appeal [of Singapore] have justified their conclusion [of a broad interpretation of Article 8(3)] principally on the grounds of effet utile. They, like the Claimants in this case, have taken the view that a narrow reading of the relevant treaty provisions would deprive them of any practical meaning.64 The Tribunal in China Heilongjiang did not share this concern. It stated as follows with respect to cases where the occurrence of a ‘direct’ expropriation is undisputed: In the Tribunal’s view, paragraph 3 of Article 8 will still retain its legal effect. Arbitration before an ad hoc arbitral tribunal would be available in cases where an expropriation has been formally proclaimed and what is disputed is the amount to be paid by the State to the investor for its expropriated investment. In other words, arbitration will be available where the dispute is indeed limited to the amount of compensation for a proclaimed expropriation, the occurrence of which is not contested. While it may be the case that formally proclaimed expropriations are a less common event than measures having an effect equivalent to nationalisation or expropriation (which are also prohibited by Article 4 of the Treaty), the Tribunal cannot see that an arbitration provision that would nevertheless encompass an entire category of disputes can fairly be said to be lacking effet utile.65 Furthermore, contrary to what the Court of Appeal of Singapore held with regard to the respondent state’s ne ultra petita argument in the Sanum case,66 the Tribunal in China Heilongjiang found that arbitration under Article 8(3) of the PRC–Mongolia BIT is also available with respect to a dispute over the amount of compensation for an ‘indirect’ expropriation. In the Tribunal’s view, the fork-in-the-road provision in the last sentence of Article 8(3) of the PRC–Mongolia BIT does not ‘deprive an ad hoc arbitral tribunal of jurisdiction where an investor, in the course of prior judicial proceedings [in the host state’s national courts], had expressly sought to reserve the question of compensation for a decision in arbitration.’67 In light of the above, the Tribunal found that there is a meaningful opportunity to make use of the narrow dispute settlement clause in Article 8(3) of the PRC–Mongolia BIT.68 It added that it does also not see that ‘an investor would be left without legal recourse for the protection of its investment in circumstances beyond the scope of the agreement to arbitrate’ contained in Article 8(3) of the BIT.69 In this respect, the Tribunal emphasized that Articles 8(1)–(2) of the PRC–Mongolia BIT clearly envisaged as primary method an unrestricted dispute settlement through amicable negotiations and judicial proceedings in the national courts of the host state, and that, ‘in particular in the context of a treaty in which arbitration was framed as an exception’, it does not see grounds ‘for considering arbitration to be preferable to these methods.’70 Lastly, the Tribunal in China Heilongjiang stressed that ‘object and purpose’ of the PRC–Mongolia BIT do not allow reaching a different conclusion. It found that nothing in the preamble of the treaty, consisting of only one single paragraph, suggests that the parties to the treaty ‘intended to confer upon an arbitral tribunal to be constituted under Article 8 a broad jurisdiction over all issues arising in connection with a claimed expropriation.’71 Referring to the judgment in LaGrand, in which the International Court of Justice held that ‘[w]here jurisdiction exists over a dispute on a particular matter, no separate basis for jurisdiction is required by the Court to consider the remedies a party has requested for the breach of the obligation’,72 the Tribunal concluded by stating that the treaty parties have carefully worded Article 8(3) of the PRC–Mongolia BIT, that only the narrow issue of disputes involving the amount of compensation for expropriation falls within its jurisdiction, and that all other disputes, including this amount issue, can be submitted to a national court.73 According to the Tribunal in China Heilongjiang: This is what the two States, Mongolia and China, agreed on in 1991 when they signed the Treaty. This arrangement should not be surprising as both States then had similar political and economic systems and did not have any reason to question the judicial system of the other Treaty Party and consequently to favour international arbitration for the settlement of investment disputes.74 4. CONCLUSION The recent decision in China Heilongjiang marks a turning point with respect to the interpretation of narrow dispute settlement clauses in PRC first-generation BITs by investment treaty tribunals. The decision is of high relevance in light of identically-worded narrow dispute settlement clauses in BITs concluded between the PRC and other countries than Mongolia such as Australia, Japan, or the UK. Unlike the majority of previous judicial bodies concerned with the same interpretative issue, the Tribunal in China Heilongjiang rejected a broad interpretation of the narrow dispute settlement clause in the PRC–Mongolia BIT. For a reader of the decision, it is difficult not to get the impression that the Tribunal did not shy away from reading the contested dispute settlement clause as what it is according to its wording; namely, an exceptionally narrow inter-state agreement on investment arbitration. The Tribunal rejected thoughts of ‘that which must not, cannot be’ and prior judicial findings that were motivated by effet utile considerations. However, it remains to be noted that even the two judicial bodies that adopted a narrow interpretative approach (ie the High Court of Singapore in the Sanum case and the Tribunal in China Heilongjiang) diverged with regard to the reading of the fork-in-the-road provision in the last sentence of Article 8(3) of their respective PRC BITs; the interpretation of which becomes crucial in cases of an alleged ‘indirect’ expropriation. While the High Court of Singapore noted that the wording of the last sentence in Article 8(3) of the PRC–Laos BIT ‘the provisions of this paragraph shall not apply if the investor concerned has resorted to the procedure specified in paragraph 2’ ‘is unequivocal and nothing in Art 8(3) [of that BIT] in fact supports the [ne ultra petita] interpretation’ advanced by the respondent state,75 the Tribunal in China Heilongjiang found that the identical last sentence in Article 8(3) of the PRC–Mongolia BIT does not ‘deprive an ad hoc arbitral tribunal of jurisdiction where an investor, in the course of prior judicial proceedings [in a national court], had expressly sought to reserve the question of compensation for a decision in arbitration.’76 Not only in light of the open issue above it might be expected that the most recent decision in China Heilongjiang solely presents a ‘provisional’ end of debates on the interpretation of narrow dispute settlement clauses in PRC first-generation BITs. The Claimants in China Heilongjiang submitted a court petition to vacate the award in New York as the seat of arbitration.77 Footnotes 1 This includes, eg the 1986 PRC–UK BIT, the 1988 PRC–Australia BIT, and the 1988 PRC–Japan BIT. 2 Agreement between the Government of the PRC and the Government of the Mongolian People’s Republic concerning the Encouragement and Reciprocal Protection of Investments (PRC–Mongolia BIT) (signed 25 August 1991, entered into force 1 November 1993) <http://investmentpolicyhub.unctad.org/IIA> accessed 14 May 2018. 3 Emphasis added. 4 Reportedly, Romanian BITs introduced such narrow dispute settlement clauses in the 1970s before other East European countries and the PRC followed suit (see P Peters, ‘Dispute Settlement Arrangements in Investment Treaties’ (1991) 22 Netherlands Ybk Intl L 91, 129). The PRC expanded its dispute settlement clauses (ie its investor–state arbitration offers) in its ‘second-generation’ BITs, as concluded from 1998 onwards (see JR Weeramantry, ‘Investor–State Dispute Settlement Provisions in China’s Investment Treaties’ (2012) 1 ICSID Rev – Foreign Investment L J 192, 194, 197). 5 This includes, eg the BIT protection standards of ‘fair and equitable treatment’ and ‘full protection and security’ to be accorded by the host state, and the guarantee to ‘freely transfer funds’ out of the host state. Investor–state disputes arising under these BIT rules must be settled in the host state’s national courts pursuant to art 8(2) of the PRC–Mongolia BIT. 6 On the question of whether such narrow dispute settlement clauses in BITs can be ‘circumvented’ per broadly drafted (contractual) arbitration agreements directly entered into between investor and host state, see B Scharaw, The Protection of Foreign Investments in Mongolia: Treaties, Domestic Law, and Contracts on Investments in International Comparison and Arbitral Practice (Springer 2017) 256–58. 7 China Heilongjiang International Economic & Technical Cooperative Corp., Beijing Shougang Mining Investment Company Ltd., and Qinhuangdaoshi Qinlong International Industrial Co. Ltd. v Mongolia (China Heilongjiang) (Award, 30 June 2017), UNCITRAL, PCA Case No 2010-20 <https://www.iareporter.com/document-downloads/> accessed 14 May 2018. 8 Señor Tza Yap Shum v Peru (Tza Yap Shum v Peru) (Decision on Jurisdiction, 19 June 2009), ICSID Case No ARB/07/6. 9 Agreement between the Government of Peru and the Government of the People’s Republic of China concerning the Encouragement and Reciprocal Protection of Investments (PRC–Peru BIT) (signed 9 June 1994, entered into force 1 February 1995) <http://investmentpolicyhub.unctad.org/IIA> accessed 14 May 2018. 10 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) (opened for signature 18 March 1965, entered into force 14 October 1966) 575 UNTS 159. 11 Art 8(3) of the PRC–Peru BIT states as follows: Any dispute between an investor of one Contracting Party and the other Contracting Party in connection with an investment in the territory of the other Contracting Party shall, as far as possible, be settled amicably through negotiations … If the dispute cannot be settled through negotiations within six months, either party to the dispute shall be entitled to submit the dispute to the competent court of the Contracting Party accepting the investment. If a dispute involving the amount of compensation for expropriation cannot be settled within six months after resort to negotiations as specified in Paragraph 1 of this Article, it may be submitted at the request of either party to the international arbitration of the International Center for Settlement of Investment Disputes (ICSID) … Any disputes concerning other matters between an investor of either Contracting Party and the other Contracting Party may be submitted to the Center if the parties to the dispute so agree. The provisions of this Paragraph shall not apply if the investor concerned has resorted to the procedure specified in Paragraph 2 of this Article. (Emphasis added.) 12 Vienna Convention on the Law of Treaties (VCLT) (opened for signature 23 May 1969, entered into force 27 January 1980) 1155 UNTS 331. 13 Tza Yap Shum v Peru (n 8) para 151. 14 ibid paras 153, 187. 15 See ibid para 188. 16 That is, whether the expropriation is in the public interest and whether it was carried out on a non-discriminatory basis, under due process of law and was accompanied by compensation. See art 4(1) of the PRC–Laos BIT. 17 Tza Yap Shum v Peru (n 8) paras 154–59, 188. 18 art 52(1) of the ICSID Convention states as follows: Either party may request annulment of the award by an application in writing addressed to the Secretary-General on one or more of the following grounds: that the Tribunal was not properly constituted; that the Tribunal has manifestly exceeded its powers; that there was corruption on the part of a member of the Tribunal; that there has been a serious departure from a fundamental rule of procedure; or that the award has failed to state the reasons on which it is based. 19 ibid para 80. 20 ibid. 21 ibid para 98. 22 ibid. 23 ibid. 24 ibid para 99. 25 ibid. 26 Sanum Investments Ltd. v Laos (Sanum v Laos) (Award on Jurisdiction, 13 December 2013), UNCITRAL, PCA Case No 2013-13. 27 The second jurisdictional issue in the case concerned the question of whether the claimant Sanum, as a legal entity established in the Macao SAR, was entitled to rely on the PRC–Laos BIT (ie whether the PRC–Laos BIT extended to Macao) after Macao’s handover to the PRC in 1999. 28 Agreement between the Government of the People’s Republic of China and the Government of the Lao People’s Democratic Republic Concerning the Encouragement and Reciprocal Protection of Investments (PRC–Laos BIT) (signed 31 January 1993, entered into force 1 June 1993) <http://investmentpolicyhub.unctad.org/IIA> accessed 14 May 2018. 29 Art 8 of the PRC–Laos BIT provides as follows: Any dispute between an investor of one Contracting State and the other Contracting State in connection with an investment in the territory of the other Contracting State shall, as far as possible, be settled amicably through negotiation … If the dispute cannot be settled through negotiation within six months, either party to the dispute shall be entitled to submit the dispute to the competent court of the Contracting State accepting the investment. If a dispute involving the amount of compensation for expropriation cannot be settled through negotiation within six months as specified in paragraph 1 of this Article 1, it may be submitted at the request of either party to an ad hoc arbitral tribunal. The provision of this paragraph shall not apply if the investor concerned has resorted to the procedure specified in the paragraph 2 of this Article. (Emphasis added.) 30 ibid para 329. 31 ibid paras 332 and333. 32 ibid. 33 ibid para 332. 34 ibid. See also ibid paras 340–342. 35 Laos v Sanum Investments Ltd. (Laos v Sanum) [2015] SGHC 15. 36 ibid para 121. 37 ibid. 38 ibid. 39 ibid para 122. 40 ibid para 124. 41 ibid para 123. 42 Agreement between the People’s Republic of China and the Federal Republic of Germany on the Encouragement and Reciprocal Protection of Investments (PRC–Germany BIT) (signed 1 December 2003, entered into force 11 November 2005) 2362 UNTS 253. 43 See art 9(1)-(3) of the PRC–Germany BIT. 44 Laos v Sanum (n 35) para 126. 45 Laos v Sanum [2016] SGCA 57. 46 ibid para 126. 47 ibid para 147. 48 See Sanum v Laos (n 26) paras 332 and 333. 49 See Laos v Sanum (n 45) para 129. 50 ibid para 130 (emphasis in the original). 51 ibid para 132. 52 ibid para 133. 53 ibid. 54 ibid. 55 ibid (referring to Tza Yap Shum v Peru (Decision on Jurisdiction, 19 June 2009), ICSID Case No ARB/07/6, para 154). 56 Laos v Sanum (n 45) para 149. 57 On the wording of art 8 of the PRC–Mongolia BIT, see the Introduction in Section 1 above. 58 China Heilongjiang (n 7) para 435. 59 ibid para 436. 60 ibid para 437. 61 ibid. 62 ibid para 439. 63 ibid para 440. art 4(1) of the PRC–Mongolia BIT states as follows: Investments made by Investors of one Contracting State shall not be nationalized, expropriated or subjected to measures having effect equivalent to nationalisation or expropriation (hereinafter referred to as ‘expropriation’) in the territory of the other Contracting State, except for the need of social and public interests. The expropriation shall be carried out on a non-discrimination basis in accordance with legal procedures and against compensation. 64 ibid para 447. 65 ibid para 448 (emphasis in the third sentence added). 66 See Laos v Sanum (n 45) para 140. 67 China Heilongjiang (n 7) para 449. 68 ibid para 450. 69 ibid. 70 ibid. 71 ibid para 451. 72 LaGrand (Germany v United States of America) (Judgment) [2001] ICJ Rep 466, 485. 73 China Heilongjiang (n 7) para 451. 74 ibid. 75 Laos v Sanum (n 35) para 127. 76 China Heilongjiang (n 7) para 449. 77 The petition is available at <https://www.iareporter.com/document-downloads/> accessed 14 May 2018. © The Author(s) 2018. Published by Oxford University Press on behalf of the London Court of International Arbitration. All rights reserved. For permissions, please email: journals.permissions@oup.com This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Arbitration International Oxford University Press

The (provisional) end of debates on narrow dispute settlement clauses in PRC first-generation BITs?—China Heilongjiang et al v Mongolia

Arbitration International , Volume Advance Article – May 25, 2018

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Abstract

ABSTRACT To this day, arbitral tribunals constituted under international investment treaties (investment treaty tribunals) only dealt with a handful of investor–state arbitrations relating to Chinese investors abroad. In 2010, China Heilongjiang International Economic & Technical Cooperative Corporation, Beijing Shougang Mining Investment Company Ltd. and Qinhuangdaoshi Qinlong International Industrial Co. Ltd.—three companies incorporated in the People’s Republic of China (PRC) (the Claimants)—relied on the 1991 bilateral investment treaty (BIT) concluded between the PRC and Mongolia (the PRC–Mongolia BIT) to bring an expropriation claim against Mongolia for its cancellation of mining licenses held by the Claimants in the Tumurtei iron ore mine in the North of Mongolia. The UNCITRAL tribunal (the Tribunal) in China Heilongjiang et al v Mongolia (China Heilongjiang) rendered an award on 30 June 2017 (the Award) rejecting the Claimants’ claim for lack of jurisdiction ratione materiae under the narrow dispute settlement clause in the PRC–Mongolia BIT. The Tribunal decided diametrically opposed to two previous investment treaty tribunals that had to address the same interpretative question with regard to identically worded narrow dispute settlement clauses in two other ‘first-generation BITs’ of the PRC. The Tribunal also deviated from findings by national courts that were sitting in proceedings to set-aside an award rendered by one of these earlier tribunals. This case report deals with the current state of case-law relating to the application of narrow dispute settlement clauses in PRC first-generation BITs and addresses the question of whether the most recent decision in China Heilongjiang points to an end of interpretative debates that are existing in this respect. 1. INTRODUCTION Bilateral investment treaties (BITs) seek to promote and protect in- and outbound foreign investments by providing substantive protection standards such as relating to the protection against illegal expropriations, the enforcement of which is usually secured by a dispute settlement clause in the BIT allowing a foreign investor to initiate an international investor–state arbitration against the host state. The People’s Republic of China (PRC) started concluding BITs during the 1980s. Many of the PRC’s ‘first-generation BITs’ are still operating1 and of high relevance in light of steadily growing investment flows from and into the PRC. The PRC’s first-generation BITs are characterized by a remarkably narrow inter-state consent to the settlement of investor–state disputes arising under these BITs by international arbitration. Such a narrow state consent to arbitration can be found in the dispute settlement clause in Article 8 of the 1991 PRC–Mongolia BIT,2 which reads as follows: Any dispute between an investor of one Contracting State and the other Contracting State in connection with an investment in the territory of the other Contracting State shall as far as possible be settled amicably through negotiations between the parties to the dispute. If the dispute cannot be settled through negotiations within six months, either party to the dispute shall be entitled to submit the dispute to the competent court of the Contracting State accepting the investment. If a dispute involving the amount of compensation for expropriation cannot be settled within six months after resorted to negotiations as specified in paragraph 1 of this Article, it may be submitted at the request of either party to an ad hoc arbitral tribunal. The provision of this paragraph shall not apply if the investor concerned has resorted to the procedure specified in the paragraph 2 of this Article.3 This and similar narrow dispute settlement clauses in other first-generation BITs of the PRC are particularly noteworthy for two reasons:4 first, the above Article 8(3) confines the jurisdiction of an arbitral tribunal to the issue of expropriation and excludes arbitration with respect to other substantive protection standards provided by the BIT.5 Secondly, Article 8(3) only refers to investor–state disputes ‘involving the amount of compensation’ in cases of expropriation.6 In China Heilongjiang et al v Mongolia (China Heilongjiang),7 the question arose whether this narrow investor–state arbitration offer by the treaty parties in Article 8(3) of the PRC–Mongolia BIT enables an arbitral tribunal to examine if an alleged expropriation of the Claimants’ investment by the host state has actually ‘occurred’. In recent years, the same legal issue was subject to two other investment cases: Tza Yap Shum v Peru and Sanum Investments v Laos. These cases were pending before two investment treaty tribunals that operated based on identically-worded narrow dispute settlement clauses in the Articles 8(1)–(3) of two other BITs of the PRC, one ad hoc annulment committee that was called upon by the respondent state to annul the award in Tza Yap Shum v Peru, and two national courts that had to decide in proceedings initiated by the respondent state to set aside the award in Sanum Investments v Laos, which was again rendered in favour of the claimant investor. In the following, this contribution explains the key findings in these earlier cases before it analyses the most recent decision in China Heilongjiang, which was rendered in favour of the respondent state. 2. THE APPLICATION OF NARROW DISPUTE SETTLEMENT CLAUSES IN PRC BITs IN EARLIER CASES 2.1 Tza Yap Shum v Peru 2.1.1 The ICSID tribunal The narrow type of dispute settlement clause in BITs of the PRC was interpreted for the first time in the case of (Señor) Tza Yap Shum v Peru.8 Based on Article 8(3) of the 1994 PRC–Peru BIT9 and the International Convention on the Settlement of Investment Disputes (ICSID Convention),10 the arbitration concerned claims arising out of the seizure of a bank account by Peruvian tax authorities that resulted in the deprivation of the claimant’s investment. Apart from the fact that Article 8 of the PRC–Peru BIT entitles to arbitration under the ICSID Convention, the provision has the same wording as Article 8 of the PRC–Mongolia BIT.11 The ICSID tribunal in Tza Yap Shum v Peru interpreted the narrow dispute settlement clause in Article 8 of the PRC–Peru BIT broadly and found that it has subject matter jurisdiction to examine whether Peru had actually expropriated the claimant’s investment. According to Article 31 of the Vienna Convention on the Law of Treaties (VCLT),12 the ICSID tribunal referred to the ‘ordinary meaning’ of the phrase ‘a dispute involving the amount of compensation for expropriation’ in Article 8(3) of the PRC–Peru BIT and read the term ‘involving’ broadly as meaning to ‘include’.13 Furthermore, in the tribunal’s view, the ‘context’ of Article 8(3) of the PRC–Peru BIT supports this reading. It referred to the BIT’s preamble and the treaty’s objective to promote mutual investments, which the parties to the PRC–Peru BIT presumably sought to achieve by providing investors with a right to submit certain disputes to ICSID arbitration.14 Against this background, the tribunal found that the term ‘a dispute involving the amount of compensation for expropriation’ in Article 8(3) of the PRC–Peru BIT must be interpreted to also include the legal issues usually arising in cases of expropriation;15 namely, whether the investor was actually expropriated and whether the expropriation occurred in accordance with the rules and requirements of the BIT.16 Additionally, the ICSID tribunal opined that if the question of whether and how an expropriation took place was indeed, as argued by the respondent state, a matter to be decided exclusively in the Peruvian national courts pursuant to Article 8(2) of the PRC–Peru BIT, investor–state arbitration relating to disputes over ‘the amount of compensation for expropriation’ would definitely be precluded because of the ‘fork-in-the-road provision’ in the last sentence of Article 8(3) of the PRC–Peru BIT, which makes an investor’s choice of dispute settlement in the host state’s national courts final,17 when it states that: 3. … The [arbitration] provisions of this Paragraph shall not apply if the investor concerned has resorted to the procedure specified in Paragraph 2 of this Article. Article 8(2) of the PRC–Peru BIT provides as follows: 2. If the dispute cannot be settled through negotiations within six months, either party to the dispute shall be entitled to submit the dispute to the competent court of the Contracting Party accepting the investment. 2.1.2 The ICSID ad hoc annulment committee Peru tried to annul the aforementioned decision on jurisdiction for a ‘manifest excess of powers’ by the ICSID tribunal pursuant to Article 52(1)(b) of the ICSID Convention.18 According to Peru, the ICSID tribunal ignored the narrow dispute settlement clause in the PRC–Peru BIT. The ICSID ad hoc annulment committee in Tza Yap Shum v Peru dismissed the annulment request. The committee noted at the outset ‘that there would not be a binding award in the meaning of … the ICSID Convention if an award could be annulled because the arbitral tribunal misinterpreted the language of the treaty.’19 In its view, a ‘misinterpretation of the arbitration clause [in a BIT] does not amount to a manifest excess of powers.’20 After assessing the decision’s reasoning, the annulment committee concluded that the ICSID tribunal in its interpretation of Article 8 of the PRC–Peru BIT and in its finding that the word ‘involving’ in Article 8(3) of that BIT is ambiguous did not manifestly exceed its powers.21 It highlighted that, on its face, the words ‘a dispute involving the amount of compensation for expropriation’ ‘do not include the question of the legality of expropriation, but equally do not refer to disputes exclusively limited to the amount of compensation’, and that out of context, ‘the meaning of the phrase is not textually obvious.’22 Furthermore, the annulment committee considered that the ICSID tribunal interpreted the disputed phrase in the overall context of Article 8 of the PRC–Peru BIT23 and that the tribunal underwent ‘an interpretative process mandated by the VCLT.’24 However, the ICSID ad hoc annulment committee also added that, unlike itself, a judicial body with appellate power might well find fault as a matter of law with certain aspects of the ICSID tribunal’s application of the VCLT in Tza Yap Shum v Peru.25 2.2 Sanum Investments v Laos 2.2.1 The UNCITRAL tribunal The second case in which the narrow type of dispute settlement clause in PRC’s BIT came under judicial scrutiny is Sanum Investments v Laos (Sanum v Laos).26 Filed as an ad hoc arbitration under the UNCITRAL Arbitration Rules by an investor from Macau27 and based on Article 8(3) of the 1993 PRC–Laos BIT,28 the case concerned a series of alleged state measures that affected the claimant’s investments in hotels and casinos in Laos. Article 8 of the PRC–Laos BIT provides the exact same wording as the narrow dispute settlement clause in Article 8 of the PRC–Mongolia BIT.29 The UNCITRAL tribunal in Sanum v Laos also construed its jurisdiction under the PRC–Laos BIT broadly and found itself empowered to decide whether an expropriation has occurred. Relying on the VCLT and referring to the case of Tza Yap Shum v Peru, the UNCITRAL tribunal in Sanum v Laos advanced two main arguments: first, the tribunal found that ‘[t]he term “involving” has a wider meaning than other possible terms such as “limited to” which could have been used if the intention of the State Parties had been to limit the jurisdiction of the Tribunal exclusively to disputes on the amount of compensation.’30 It also held that ‘“[t]o involve” means “to wrap”, “to include”, terms that are inclusive rather than exclusive’ and that ‘[t]his wider reading of Article 8(3) [of the PRC–Laos BIT] would seem more consistent with the other provisions of the Treaty.’31 Secondly, the UNCITRAL tribunal in Sanum v Laos considered the ‘context’ of the narrow dispute settlement clause in the PRC–Laos BIT as well as the fork-in-the-road provision in the last sentence of Article 8(3) of that BIT. Referring to the principle of effet utile, the tribunal found that a limitation of the dispute settlement clause to arbitration of disputes solely over the ‘amount of compensation for expropriation’ leaves, practically speaking, the first sentence of Article 8(3) without effect in light of the expropriation clause in Article 4(1) of the PRC–Laos BIT,32 which states that: 1. Neither Contracting State shall expropriate, nationalize or take similar measures … unless the following conditions are met: a. as necessitated by the public interest; b. in accordance with domestic legal procedures; c. without discrimination; d. against appropriate and effective compensation. The tribunal in Sanum v Laos held that ‘to establish whether an expropriation had taken place, a competent [national] court would need to decide whether the action of Laos meets the four conditions [above] … The fourth condition is “appropriate and effective compensation.”’33 Therefore, ‘if Articles 8 and Article 4(1) [of the PRC–Laos BIT] are read together, an investor who would have recourse to a competent [national] court to determine whether an expropriation has occurred would be precluded from submitting the dispute on the amount of compensation to international arbitration’ pursuant to the fork-in-the-road provision in the last sentence of Article 8(3) of the PRC–Laos BIT as a national court would already have determined the compensation.34 2.2.2 The High Court of Singapore Laos initiated proceedings to set aside the award on jurisdiction rendered in Sanum v Laos in the High Court of Singapore.35 The High Court rejected obiter the broad interpretation of the UNCITRAL tribunal in Sanum v Laos and found that the phrase ‘a dispute involving the amount of compensation’ in Article 8(3) of the PRC–Laos BIT ‘should be given a restrictive meaning, viz, disputes limited to the amount of compensation for expropriation.’36 In the High Court’s view, the word ‘involve’ is also capable of a restrictive interpretation to mean imply, entail or make necessary.37 Given the broad wording of the phrase ‘any dispute in connection with an investment’ in Article 8(1) of the PRC–Laos BIT, the court further suggested that a more restrictive meaning was intended for the term ‘a dispute involving the amount of compensation’ in Article 8(3) of that BIT.38 The High Court also considered that it is not correct to conclude that an investor would be precluded from arbitration if Article 8(3) of the PRC–Laos BIT was interpreted restrictively. An investor may initiate an arbitration if ‘the dispute remains unresolved after six months of negotiation’, ‘the dispute concerns the amount of compensation for expropriation’ and Article 8(2) of the PRC–Laos BIT ‘has not been invoked by the investor [as required by the fork-in-the-road provisions in last sentence of Article 8(3) of the BIT], ie, it may still be invoked if the State has invoked’ Article 8(2) of the BIT.39 Thus, from the investor’s perspective, the High Court of Singapore essentially limited the arbitration offer in Article 8(3) of the PRC–Laos BIT to cases in which it is undisputed that an expropriation occurred; that is, to cases of a direct or formal expropriation by the host state. Furthermore, while noting the ‘truism’ of the purpose of BITs to promote foreign investments, the High Court stated that ‘it does not follow from this general proposition that every ambiguity found in such treaties should invariably be resolved in favour of the investor.’40 Lastly, the High Court stressed the historic context of the PRC’s first-generation BITs. In its view, the limited scope of state consent to investor–state arbitration should be understood in light of the observation made in the case of Tza Yap Shum v Peru that communist regimes possessed a certain degree of distrust regarding foreign investments or private capital and were concerned about the decisions of international tribunals on matters over which they had no control.41 The High Court had no doubt that these concerns were present in the PRC–Laos BIT from 1993. It also emphasized that the PRC gradually extended its investor–state arbitration offers in its ‘second- and third-generation’ BITs, as concluded by the PRC from 1998 onwards. It exemplarily referred to the 2003 PRC–Germany BIT,42 which allows ‘any’ investor–state dispute to be arbitrated.43 Against this background, the High Court of Singapore concluded that ‘the shift from PRC’s “first-generation” BITs to “second generation” suggests that the PRC–Laos BIT which fell into the former category should be read restrictively.’44 2.2.3 The Court of Appeal of Singapore The claimant Sanum challenged the findings of the High Court of Singapore in the Court of Appeal of Singapore. The latter found that the High Court erred in its interpretation of the narrow dispute settlement clause in Article 8 of the PRC–Laos BIT.45 According to the Court of Appeal, the term ‘involving’ in Article 8(3) of the PRC–Laos BIT is capable of supporting both a broad and narrow interpretation and that thus the ‘ordinary meaning’ of the phrase will not help to interpret the dispute settlement clause.46 However, in the view of the Court of Appeal, a broad interpretation should apply to Article 8(3) of the PRC–Laos BIT ‘given the specific context surrounding’ that Article.47 In this respect, Laos opposed the view of the UNCITRAL tribunal in Sanum v Laos that a limitation of the dispute settlement clause to arbitration of disputes over the ‘amount of compensation for expropriation’ leaves, practically speaking, Article 8(3) of the PRC–Laos BIT without effect because of the expropriation clause in Article 4(1) and the fork-in-the-road provision in the last sentence of Article 8(3) of that BIT.48 Laos argued that one must distinguish between the expropriation issues of ‘liability’ of the host state on the one side and ‘quantum’ on the other. Laos further contended that a claimant such as Sanum could submit liability issues in relation to an alleged (indirect) expropriation to a national court while asking that court not to determine the appropriate amount of compensation (the ne ultra petita argument): ‘[i]n so doing, the claimant would remain free to have an arbitral tribunal determine the issue of compensation.’49 The Court of Appeal’s finding is mainly based on a rejection of Laos’ prior submission. In the court’s view, the words in the last sentence of Article 8(3) of the PRC–Laos BIT ‘the provisions of this paragraph shall not apply if the investor concerned has resorted to the procedure specified in paragraph 2’ mean that: [I]f any dispute is brought to the national court, the claimant will no longer be entitled to refer any aspect of that dispute to arbitration. Hence once an expropriation claim is referred to the national court, no aspect of that claim can then be brought to arbitration.50 The Court of Appeal further noted that the High Court of Singapore found that Article 8(3) of the PRC–Laos BIT only applies with respect to disputes over ‘the amount of compensation’ for expropriation although the High Court was mindful of the argument by the claimant Sanum that reducing Article 8(3) of the BIT to this (undisputed) scope of application ‘might denude the arbitration clause of [its practical] force’ as the question of whether an expropriation occurred is usually in dispute in today’s investment arbitration practice.51 According to the Court of Appeal, the narrow interpretation of the High Court must be rejected as, first, ‘direct’ expropriations (where only quantum is disputed) are becoming increasingly rare.52 In the Court of Appeal’s view, the High Court’s interpretation would imply that it is entirely open to the host state to avoid arbitration for ‘indirect’ expropriation by denying an alleged expropriatory act.53 In this case, however, the investor is required to ask a national court for a ruling that the host state had committed such an act and in so doing, it is barred from bringing a dispute on compensation to arbitration pursuant to the fork-in-the-road provision in the last sentence of Article 8(3) of the PRC–Laos BIT.54 The Court of Appeal cited the finding of the ICSID tribunal in Tza Yap Shum v Peru that this ‘would lead to an untenable conclusion— namely that the investor could never actually have access to arbitration’.55 Lastly, the Court of Appeal noted that its broad interpretation of the narrow dispute settlement clause in the PRC–Laos BIT is consistent with the treaty’s object and purpose of protecting mutual investments.56 The Court of Appeal restored the decision on jurisdiction rendered by the UNCITRAL tribunal in Sanum v Laos. 3. THE DECISION IN CHINA HEILONGJIANG Unlike the aforementioned judicial bodies with respect to their narrow dispute settlement clauses in the BITs between the PRC and Peru as well as the PRC and Laos (with the exception of the High Court of Singapore in the Sanum case), the Tribunal in China Heilongjiang reached the conclusion that it lacks jurisdiction ratione materiae under the narrow dispute settlement clause in Article 8(3) of the PRC–Mongolia BIT with regard to an examination of the legal issue of whether an expropriation of the Claimants by Mongolia has actually occurred.57 The Tribunal in China Heilongjiang pointed out that based on Article 8(2) of the PRC–Mongolia BIT the jurisdiction of a national court encompasses ‘all’ investor–state disputes concerning the host state’s compliance with its obligations under the BIT. This includes the host state’s duty with regard to Article 4(1) of the BIT not to subject an investment to measures of expropriation, except for the need of social and public interests and while respecting the obligations of non-discrimination and paying appropriate compensation without unreasonable delay.58 On the other hand, as recalled by the Tribunal, Article 8(3) of the PRC–Mongolia BIT only provides state consent to arbitrate ‘a dispute involving the amount of compensation for expropriation’.59 The Tribunal explained that for such a dispute ‘neither a court nor an ad hoc arbitral tribunal is given exclusive jurisdiction’ but that ‘[t]he investor has a choice’.60 However, once this choice has been made and a dispute involving the amount of compensation for expropriation is submitted to a national court, the jurisdiction of an arbitral tribunal is barred pursuant to the fork-in-the-road provision in the last sentence of Article 8(3) of the PRC–Mongolia BIT.61 Also the Tribunal in China Heilongjiang considered that interpreting the phrase ‘a dispute involving the amount of compensation for expropriation’ is the critical legal issue. As for the ‘ordinary meaning’ of this phrase, it agreed with the Court of Appeal of Singapore in the Sanum case, which had to interpret an identical provision in the PRC–Laos BIT, that the term ‘involve’ is capable of supporting either a broad or a narrow interpretation, and that Article 8(3) of the PRC–Mongolia BIT can thus only be accurately understood by considering the ‘context’ of that provision.62 The Tribunal stated that part of this context is the expropriation rule in Article 4 of the PRC–Mongolia BIT.63 It recalled that other judicial bodies have examined PRC BITs that are substantially similar and that: These tribunals and the Court of Appeal [of Singapore] have justified their conclusion [of a broad interpretation of Article 8(3)] principally on the grounds of effet utile. They, like the Claimants in this case, have taken the view that a narrow reading of the relevant treaty provisions would deprive them of any practical meaning.64 The Tribunal in China Heilongjiang did not share this concern. It stated as follows with respect to cases where the occurrence of a ‘direct’ expropriation is undisputed: In the Tribunal’s view, paragraph 3 of Article 8 will still retain its legal effect. Arbitration before an ad hoc arbitral tribunal would be available in cases where an expropriation has been formally proclaimed and what is disputed is the amount to be paid by the State to the investor for its expropriated investment. In other words, arbitration will be available where the dispute is indeed limited to the amount of compensation for a proclaimed expropriation, the occurrence of which is not contested. While it may be the case that formally proclaimed expropriations are a less common event than measures having an effect equivalent to nationalisation or expropriation (which are also prohibited by Article 4 of the Treaty), the Tribunal cannot see that an arbitration provision that would nevertheless encompass an entire category of disputes can fairly be said to be lacking effet utile.65 Furthermore, contrary to what the Court of Appeal of Singapore held with regard to the respondent state’s ne ultra petita argument in the Sanum case,66 the Tribunal in China Heilongjiang found that arbitration under Article 8(3) of the PRC–Mongolia BIT is also available with respect to a dispute over the amount of compensation for an ‘indirect’ expropriation. In the Tribunal’s view, the fork-in-the-road provision in the last sentence of Article 8(3) of the PRC–Mongolia BIT does not ‘deprive an ad hoc arbitral tribunal of jurisdiction where an investor, in the course of prior judicial proceedings [in the host state’s national courts], had expressly sought to reserve the question of compensation for a decision in arbitration.’67 In light of the above, the Tribunal found that there is a meaningful opportunity to make use of the narrow dispute settlement clause in Article 8(3) of the PRC–Mongolia BIT.68 It added that it does also not see that ‘an investor would be left without legal recourse for the protection of its investment in circumstances beyond the scope of the agreement to arbitrate’ contained in Article 8(3) of the BIT.69 In this respect, the Tribunal emphasized that Articles 8(1)–(2) of the PRC–Mongolia BIT clearly envisaged as primary method an unrestricted dispute settlement through amicable negotiations and judicial proceedings in the national courts of the host state, and that, ‘in particular in the context of a treaty in which arbitration was framed as an exception’, it does not see grounds ‘for considering arbitration to be preferable to these methods.’70 Lastly, the Tribunal in China Heilongjiang stressed that ‘object and purpose’ of the PRC–Mongolia BIT do not allow reaching a different conclusion. It found that nothing in the preamble of the treaty, consisting of only one single paragraph, suggests that the parties to the treaty ‘intended to confer upon an arbitral tribunal to be constituted under Article 8 a broad jurisdiction over all issues arising in connection with a claimed expropriation.’71 Referring to the judgment in LaGrand, in which the International Court of Justice held that ‘[w]here jurisdiction exists over a dispute on a particular matter, no separate basis for jurisdiction is required by the Court to consider the remedies a party has requested for the breach of the obligation’,72 the Tribunal concluded by stating that the treaty parties have carefully worded Article 8(3) of the PRC–Mongolia BIT, that only the narrow issue of disputes involving the amount of compensation for expropriation falls within its jurisdiction, and that all other disputes, including this amount issue, can be submitted to a national court.73 According to the Tribunal in China Heilongjiang: This is what the two States, Mongolia and China, agreed on in 1991 when they signed the Treaty. This arrangement should not be surprising as both States then had similar political and economic systems and did not have any reason to question the judicial system of the other Treaty Party and consequently to favour international arbitration for the settlement of investment disputes.74 4. CONCLUSION The recent decision in China Heilongjiang marks a turning point with respect to the interpretation of narrow dispute settlement clauses in PRC first-generation BITs by investment treaty tribunals. The decision is of high relevance in light of identically-worded narrow dispute settlement clauses in BITs concluded between the PRC and other countries than Mongolia such as Australia, Japan, or the UK. Unlike the majority of previous judicial bodies concerned with the same interpretative issue, the Tribunal in China Heilongjiang rejected a broad interpretation of the narrow dispute settlement clause in the PRC–Mongolia BIT. For a reader of the decision, it is difficult not to get the impression that the Tribunal did not shy away from reading the contested dispute settlement clause as what it is according to its wording; namely, an exceptionally narrow inter-state agreement on investment arbitration. The Tribunal rejected thoughts of ‘that which must not, cannot be’ and prior judicial findings that were motivated by effet utile considerations. However, it remains to be noted that even the two judicial bodies that adopted a narrow interpretative approach (ie the High Court of Singapore in the Sanum case and the Tribunal in China Heilongjiang) diverged with regard to the reading of the fork-in-the-road provision in the last sentence of Article 8(3) of their respective PRC BITs; the interpretation of which becomes crucial in cases of an alleged ‘indirect’ expropriation. While the High Court of Singapore noted that the wording of the last sentence in Article 8(3) of the PRC–Laos BIT ‘the provisions of this paragraph shall not apply if the investor concerned has resorted to the procedure specified in paragraph 2’ ‘is unequivocal and nothing in Art 8(3) [of that BIT] in fact supports the [ne ultra petita] interpretation’ advanced by the respondent state,75 the Tribunal in China Heilongjiang found that the identical last sentence in Article 8(3) of the PRC–Mongolia BIT does not ‘deprive an ad hoc arbitral tribunal of jurisdiction where an investor, in the course of prior judicial proceedings [in a national court], had expressly sought to reserve the question of compensation for a decision in arbitration.’76 Not only in light of the open issue above it might be expected that the most recent decision in China Heilongjiang solely presents a ‘provisional’ end of debates on the interpretation of narrow dispute settlement clauses in PRC first-generation BITs. The Claimants in China Heilongjiang submitted a court petition to vacate the award in New York as the seat of arbitration.77 Footnotes 1 This includes, eg the 1986 PRC–UK BIT, the 1988 PRC–Australia BIT, and the 1988 PRC–Japan BIT. 2 Agreement between the Government of the PRC and the Government of the Mongolian People’s Republic concerning the Encouragement and Reciprocal Protection of Investments (PRC–Mongolia BIT) (signed 25 August 1991, entered into force 1 November 1993) <http://investmentpolicyhub.unctad.org/IIA> accessed 14 May 2018. 3 Emphasis added. 4 Reportedly, Romanian BITs introduced such narrow dispute settlement clauses in the 1970s before other East European countries and the PRC followed suit (see P Peters, ‘Dispute Settlement Arrangements in Investment Treaties’ (1991) 22 Netherlands Ybk Intl L 91, 129). The PRC expanded its dispute settlement clauses (ie its investor–state arbitration offers) in its ‘second-generation’ BITs, as concluded from 1998 onwards (see JR Weeramantry, ‘Investor–State Dispute Settlement Provisions in China’s Investment Treaties’ (2012) 1 ICSID Rev – Foreign Investment L J 192, 194, 197). 5 This includes, eg the BIT protection standards of ‘fair and equitable treatment’ and ‘full protection and security’ to be accorded by the host state, and the guarantee to ‘freely transfer funds’ out of the host state. Investor–state disputes arising under these BIT rules must be settled in the host state’s national courts pursuant to art 8(2) of the PRC–Mongolia BIT. 6 On the question of whether such narrow dispute settlement clauses in BITs can be ‘circumvented’ per broadly drafted (contractual) arbitration agreements directly entered into between investor and host state, see B Scharaw, The Protection of Foreign Investments in Mongolia: Treaties, Domestic Law, and Contracts on Investments in International Comparison and Arbitral Practice (Springer 2017) 256–58. 7 China Heilongjiang International Economic & Technical Cooperative Corp., Beijing Shougang Mining Investment Company Ltd., and Qinhuangdaoshi Qinlong International Industrial Co. Ltd. v Mongolia (China Heilongjiang) (Award, 30 June 2017), UNCITRAL, PCA Case No 2010-20 <https://www.iareporter.com/document-downloads/> accessed 14 May 2018. 8 Señor Tza Yap Shum v Peru (Tza Yap Shum v Peru) (Decision on Jurisdiction, 19 June 2009), ICSID Case No ARB/07/6. 9 Agreement between the Government of Peru and the Government of the People’s Republic of China concerning the Encouragement and Reciprocal Protection of Investments (PRC–Peru BIT) (signed 9 June 1994, entered into force 1 February 1995) <http://investmentpolicyhub.unctad.org/IIA> accessed 14 May 2018. 10 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) (opened for signature 18 March 1965, entered into force 14 October 1966) 575 UNTS 159. 11 Art 8(3) of the PRC–Peru BIT states as follows: Any dispute between an investor of one Contracting Party and the other Contracting Party in connection with an investment in the territory of the other Contracting Party shall, as far as possible, be settled amicably through negotiations … If the dispute cannot be settled through negotiations within six months, either party to the dispute shall be entitled to submit the dispute to the competent court of the Contracting Party accepting the investment. If a dispute involving the amount of compensation for expropriation cannot be settled within six months after resort to negotiations as specified in Paragraph 1 of this Article, it may be submitted at the request of either party to the international arbitration of the International Center for Settlement of Investment Disputes (ICSID) … Any disputes concerning other matters between an investor of either Contracting Party and the other Contracting Party may be submitted to the Center if the parties to the dispute so agree. The provisions of this Paragraph shall not apply if the investor concerned has resorted to the procedure specified in Paragraph 2 of this Article. (Emphasis added.) 12 Vienna Convention on the Law of Treaties (VCLT) (opened for signature 23 May 1969, entered into force 27 January 1980) 1155 UNTS 331. 13 Tza Yap Shum v Peru (n 8) para 151. 14 ibid paras 153, 187. 15 See ibid para 188. 16 That is, whether the expropriation is in the public interest and whether it was carried out on a non-discriminatory basis, under due process of law and was accompanied by compensation. See art 4(1) of the PRC–Laos BIT. 17 Tza Yap Shum v Peru (n 8) paras 154–59, 188. 18 art 52(1) of the ICSID Convention states as follows: Either party may request annulment of the award by an application in writing addressed to the Secretary-General on one or more of the following grounds: that the Tribunal was not properly constituted; that the Tribunal has manifestly exceeded its powers; that there was corruption on the part of a member of the Tribunal; that there has been a serious departure from a fundamental rule of procedure; or that the award has failed to state the reasons on which it is based. 19 ibid para 80. 20 ibid. 21 ibid para 98. 22 ibid. 23 ibid. 24 ibid para 99. 25 ibid. 26 Sanum Investments Ltd. v Laos (Sanum v Laos) (Award on Jurisdiction, 13 December 2013), UNCITRAL, PCA Case No 2013-13. 27 The second jurisdictional issue in the case concerned the question of whether the claimant Sanum, as a legal entity established in the Macao SAR, was entitled to rely on the PRC–Laos BIT (ie whether the PRC–Laos BIT extended to Macao) after Macao’s handover to the PRC in 1999. 28 Agreement between the Government of the People’s Republic of China and the Government of the Lao People’s Democratic Republic Concerning the Encouragement and Reciprocal Protection of Investments (PRC–Laos BIT) (signed 31 January 1993, entered into force 1 June 1993) <http://investmentpolicyhub.unctad.org/IIA> accessed 14 May 2018. 29 Art 8 of the PRC–Laos BIT provides as follows: Any dispute between an investor of one Contracting State and the other Contracting State in connection with an investment in the territory of the other Contracting State shall, as far as possible, be settled amicably through negotiation … If the dispute cannot be settled through negotiation within six months, either party to the dispute shall be entitled to submit the dispute to the competent court of the Contracting State accepting the investment. If a dispute involving the amount of compensation for expropriation cannot be settled through negotiation within six months as specified in paragraph 1 of this Article 1, it may be submitted at the request of either party to an ad hoc arbitral tribunal. The provision of this paragraph shall not apply if the investor concerned has resorted to the procedure specified in the paragraph 2 of this Article. (Emphasis added.) 30 ibid para 329. 31 ibid paras 332 and333. 32 ibid. 33 ibid para 332. 34 ibid. See also ibid paras 340–342. 35 Laos v Sanum Investments Ltd. (Laos v Sanum) [2015] SGHC 15. 36 ibid para 121. 37 ibid. 38 ibid. 39 ibid para 122. 40 ibid para 124. 41 ibid para 123. 42 Agreement between the People’s Republic of China and the Federal Republic of Germany on the Encouragement and Reciprocal Protection of Investments (PRC–Germany BIT) (signed 1 December 2003, entered into force 11 November 2005) 2362 UNTS 253. 43 See art 9(1)-(3) of the PRC–Germany BIT. 44 Laos v Sanum (n 35) para 126. 45 Laos v Sanum [2016] SGCA 57. 46 ibid para 126. 47 ibid para 147. 48 See Sanum v Laos (n 26) paras 332 and 333. 49 See Laos v Sanum (n 45) para 129. 50 ibid para 130 (emphasis in the original). 51 ibid para 132. 52 ibid para 133. 53 ibid. 54 ibid. 55 ibid (referring to Tza Yap Shum v Peru (Decision on Jurisdiction, 19 June 2009), ICSID Case No ARB/07/6, para 154). 56 Laos v Sanum (n 45) para 149. 57 On the wording of art 8 of the PRC–Mongolia BIT, see the Introduction in Section 1 above. 58 China Heilongjiang (n 7) para 435. 59 ibid para 436. 60 ibid para 437. 61 ibid. 62 ibid para 439. 63 ibid para 440. art 4(1) of the PRC–Mongolia BIT states as follows: Investments made by Investors of one Contracting State shall not be nationalized, expropriated or subjected to measures having effect equivalent to nationalisation or expropriation (hereinafter referred to as ‘expropriation’) in the territory of the other Contracting State, except for the need of social and public interests. The expropriation shall be carried out on a non-discrimination basis in accordance with legal procedures and against compensation. 64 ibid para 447. 65 ibid para 448 (emphasis in the third sentence added). 66 See Laos v Sanum (n 45) para 140. 67 China Heilongjiang (n 7) para 449. 68 ibid para 450. 69 ibid. 70 ibid. 71 ibid para 451. 72 LaGrand (Germany v United States of America) (Judgment) [2001] ICJ Rep 466, 485. 73 China Heilongjiang (n 7) para 451. 74 ibid. 75 Laos v Sanum (n 35) para 127. 76 China Heilongjiang (n 7) para 449. 77 The petition is available at <https://www.iareporter.com/document-downloads/> accessed 14 May 2018. © The Author(s) 2018. Published by Oxford University Press on behalf of the London Court of International Arbitration. All rights reserved. For permissions, please email: journals.permissions@oup.com This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices)

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Arbitration InternationalOxford University Press

Published: May 25, 2018

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