Lexology | 7 August 2017
BUCG v. Yemen decision clears jurisdictional hurdles for investment claims by Chinese state-owned enterprises under the ICSID Convention
by Reza Mohtashami, Sami Tannous, John Choong and Matei Purice
Introduction
In a recent decision issued on 31 May 2017 in the case of Beijing Urban Construction Group Co. Ltd v. Republic Yemen1 , an ICSID Tribunal affirmed its jurisdiction over a claim brought by Beijing Urban Construction Group Co. Ltd. (BUCG), one of China’s largest international contractors, against the Republic of Yemen (Yemen) under the bilateral investment treaty (BIT) between the People’s Republic of China (PRC) and Yemen (the Treaty). In so doing, the Tribunal dismissed Yemen’s allegations that state-owned enterprises in the PRC were precluded from bringing claims under the ICSID Convention.
The dispute arises out of the termination of BUCG’s contract for the construction of an airport terminal at Sana’a. BUCG alleges that Yemen unlawfully deprived BUCG of its investment by employing its military forces and security apparatus to assault and detain BUCG’s employees and forcibly deny BUCG access to the construction site, which served as the excuse for termination of BUCG’s construction contract.
While the Tribunal has not yet considered the merits of BUCG’s claim, in its recent decision, it made certain findings on jurisdiction that are of interest for PRC enterprises with investments outside the PRC. In particular, the Tribunal found that PRC state-owned enterprises (SOEs), such as BUCG, operating as commercial entities abroad may bring claims before ICSID. The Tribunal also held that the Treaty, which provides recourse to ICSID arbitration for “any dispute relating to the amount of compensation for expropriation” empowered the Tribunal to consider BUCG’s expropriation claim, including the question of whether an expropriation had occurred.
The tribunal’s findings on jurisdiction
PRC SOEs may bring claims before ICSID
The ICSID Convention, to which 161 States are signatories, including the PRC since 1990, provides a forum for the settlement of investment disputes brought by foreign investors against host States, but excludes State-to-State disputes from its scope. The ICSID Convention does not, however, address specifically the standing of SOEs to bring claims. It is widely considered that for SOEs to bring claims at ICSID they must satisfy the so-called Broches test, formulated by Aaron Broches, the first Secretary-General of ICSID, by demonstrating that they are not acting “as an agent for the government” or “discharging an essentially governmental function”.
In this case, Yemen contended that BUCG did not meet the Broches test and therefore did not qualify as “a national of another Contracting State” under Article 25(1) of the ICSID Convention because it: (i) acted under the direction and control of the PRC government in carrying out its activities; and (ii) was empowered to exercise elements of governmental authority in the PRC.
In support of its position, Yemen relied on certain features of PRC law that are common to PRC SOEs. First, Yemen relied on the concept of “democratic centralism” under Article 3 of the PRC Constitution that applies to all State organs of the PRC. Second, Yemen relied on Article 19 of the PRC Company Law which requires corporations to permit the establishment of an organisation of the Chinese Communist Party (CCP) to carry out Party activities within the company.
Yemen argued that under PRC law, SOEs act effectively under the direction and control of the PRC government and the CCP, and, in particular, that the PRC government was the ultimate decision maker for BUCG’s operational, management and strategic decisions. According to Yemen, this is demonstrated by the fact that:
i. BUCG is wholly-owned by the State Owned Assets Supervision and Administration Commission of the State Council (SASAC), a Commission established by the PRC government. SASAC exercises general direction/oversight over PRC SOEs, in general, and makes certain management, operational and strategic decisions for PRC SOEs; and
ii. the CCP plays an integral role in the instruction, direction and control of SOEs in the PRC, including actively participating in corporate governance, personnel decisions and ensuring the implementation of principles and policies from the Party and the State.
In response, BUCG contended that the Broches test must be considered in the specific context of the investment which gives rise to the dispute, and that any structural links BUCG may have with the PRC government or the fact that it may discharge certain public functions in China are irrelevant to BUCG’s standing as an investor at ICSID. In this case, BUCG explained that its investment in Yemen (the construction of an airport terminal) was made while acting as a commercial enterprise, after participating in a competitive tender, and did not involve the exercise of governmental or public powers.
The Tribunal agreed that the relevant analysis under the Broches test is to consider whether BUCG “functions as an agent of the State in the fact-specific context.” The Tribunal noted that “the corporate controls and mechanisms are not surprising in the context of PRC State-owned corporations” and took the view that Yemen’s positioning of BUCG in the broad context of the PRC’s State-controlled economy and the structural links with the PRC government is “largely irrelevant.” The Tribunal held that “the assertion that ‘the Chinese State is the ultimate decision maker’ for BUCG is too remote from the facts of the Sana’a International Airport project to be relevant.”
The Tribunal concluded that there was no evidence to suggest that, in respect of the construction of an airport terminal in Sana’a, “… BUCG was discharging a PRC governmental function rather than a commercial function.” Rather, BUCG participated in the airport project as a general contractor following an open tender and its bid was selected on its commercial merits. Moreover, the Tribunal noted that according to Yemen’s case, BUCG’s contract had been terminated not for reasons associated with “the PRC’s decisions or policies” but for reasons associated with BUCG’s performance of its “commercial services on the airport site”.
The Tribunal’s decision is only the second ICSID decision to consider the application of the Broches test and provides welcome clarification as regards the standing of SOEs at ICSID. The decision will be of interest to PRC SOEs, which have made significant investments abroad in a variety of economic sectors, by providing important points of guidance on the capacity of PRC SOEs to bring claims against foreign states under the ICSID Convention. The BUCG decision means that PRC SOEs whose investments are protected by the PRC’s network of more than 110 BITs can bring claims at ICSID in the face of expropriatory or other adverse regulatory measures taken by host States, so long as they can demonstrate that they did not act as an agent of the PRC or discharge a public function in the host State in making their foreign investments.
Can the PRC’s first generation BITs be interpreted to allow arbitration over disputes beyond merely the quantification of an expropriation claim?
This issues arose out of the narrow scope of the dispute resolution provision found in Article 10 of the Treaty:
- Any dispute between one Contracting Party and an investor of the other Contracting Party relating to an investment shall, as far as possible, be settled amicably through deliberations and negotiations between the parties to the dispute.
- If the dispute cannot be resolved by the parties through direct arrangements for amicable negotiations within six months from the date on which a request for settlement is submitted in writing, such dispute may be submitted at the choice of the investor to:
a. a competent court of the Contracting Party in the territory of which the investment has been made; or
b. the International Centre for the Settlement of Investment Disputes (ICSID) which was established by the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States opened for signature at Washington DC on March 18, 1965, for arbitration.
For this purpose, either Contracting Party shall give its irrevocable consent to the submission of any dispute relating to the amount of compensation for expropriation for resolution under such arbitration procedure. Other disputes submitted under such procedure shall be mutually agreed upon between both Contracting Parties.
The wording of Article 10 and, in particular, the qualification regarding the availability of ICSID arbitration for “any dispute relating to the amount of compensation for expropriation” is common to the first generation of the PRC’s BITs negotiated before 1998. That said, each BIT is worded differently and should be read and interpreted in accordance with its own terms.
Yemen sought a narrow reading of Article 10 of the Treaty, limiting the Tribunal’s jurisdiction solely to disputes as to the calculation of “the amount of compensation” where there is admitted liability by the host State. Yemen relied on the published opinions of a number of well-known Chinese academics to the effect that, prior to 1998, the PRC’s intention when concluding BITs was to limit the scope of ICSID’s jurisdiction in investment disputes to matters only of quantum. The consequence of Yemen’s narrow interpretation is that, if liability is not conceded by the State, or if an investor wishes to complain about anything other than the State’s monetary assessment of its alleged loss, ICSID has no jurisdiction.
In contrast, BUCG advocated for a broad interpretation, extending the Tribunal’s jurisdiction to matters of liability of a claim for expropriation as well as an assessment of compensation, since without determining the issue of liability there could be no consideration of quantum.
Once again, the Tribunal sided with BUCG’s position and found that Article 10 of the Treaty allows an investor to bring claims relating to both issues of quantum and liability for expropriation. In reaching its decision, the Tribunal first analysed the specific wording and overall structure of Article 10 of the Treaty and found that:
i. Article 10.2 of the Treaty “clearly indicates a fork in the road” meaning that when confronted with an unresolved “legal dispute”, the Treaty grants investors “the choice between taking its dispute to a competent court of the Contracting Party, in this case Yemen, or to ICSID arbitration, but not both.” The Tribunal noted that “an interpretation that nullifies either of the choices granted to the investor is to be avoided.”
ii. the “ordinary meaning” and scope of the words “amount of compensation” is not conclusive either in favour of the broad interpretation or the narrow interpretation. In this regard, the Tribunal echoed the decision of the Singapore Court of Appeal in Sanum v. Laos2 (which was tasked to resolve a similar question relating to the PRC-Laos BIT), finding that, where the “ordinary meaning” of a BIT was not conclusive, the task of interpretation moves to context, object, and purpose of the BIT.
Moving to the context, object and purpose of the Treaty, the Tribunal found that a narrow interpretation that excluded disputes over liability for expropriation would lead to an “internal contradiction” and allow the State unilaterally to deny an investor’s access to investment arbitration simply by refusing to concede liability. In this regard, the Tribunal agreed with a previous ICSID tribunal in Tza Yap Shum v. Peru3 (which was tasked to interpret a similar dispute resolution provision found in the PRC-Peru BIT) and concluded that the interpretation urged by the Respondent “would lead to an untenable conclusion, namely, that the investor would never actually have access to arbitration” unless the Respondent agreed. This, the Tribunal found, “would undermine achievement of the BIT’s object and purpose”.
In the circumstances, the Tribunal concluded that “the Contracting Parties intended to confer a real choice, not an illusory choice, on investors from their respective countries, and that the words ‘relating to the amount of compensation for expropriation’ must, in context, be read to include disputes relating to whether or not an expropriation has occurred.” The Tribunal declined, however, to expand the scope of its jurisdiction further by application of the Treaty’s Most Favoured Nation (MFN) Clause.
This decision is consistent with the previous line of cases in Tza Yap Shum v. Peru and Sanum v. Laos and provides further guidance to PRC investors since many early PRC BITs (that are still in force today) have similarly worded dispute resolution provisions. The Tribunal’s decision, however, is specific to the wording and structure of the Treaty under consideration. As mentioned above, each BIT is worded differently and, as such, must be interpreted on its terms.
Further clarity for Chinese investors in relation to future claims
The PRC economy has undergone tremendous change and growth over the past 30 years, such that the PRC has become a significant capital-exporting economy with many SOEs engaged in investments across the globe as part of the PRC’s Belt and Road initiative. Those investments benefit from the protections offered by the PRC’s large number of BITs. The BUCG v. Yemen case has clarified the standing of SOEs to bring claims at ICSID under the PRC’s BITs and the scope of claims that may be pursued thereunder.
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