Lexology | 17 July 2017
China-related investment arbitrations: three recent developments
by Brenda Horrigan, Tomas Furlong and Joern Eschment
The last two months have delivered three notable developments in China-related investment arbitrations. In addition to the third known claim to be lodged at ICSID against the People’s Republic of China (PRC), two recent and potentially inconsistent decisions in claims by PRC investors have raised questions as to the scope of protection under PRC bilateral investment treaties (BITs).
With respect to proceedings against the PRC, German food and spice manufacturer Hela Schwarz GmbH (Hela) on 21 June 2017 registered its claims under the 2003 "second generation" PRC-Germany BIT (ICSID Case No. ARB/17/19). Little is known about the claims, which appear to arise from alleged PRC actions in relation to Hela’s investment in Beijing or Jinan (Shandong province), and the Tribunal has not yet been constituted. Although the PRC is signatory to 131 BITs and other instruments, there are only two prior publicly-known ICSID arbitrations against the PRC, both of which have been concluded. Ekran Berhad v PRC (ICSID Case No. ARB/11/15) was suspended by agreement a month after being registered and discontinued on unknown terms just under two years later in 2011. Earlier this year, in Ansung Housing v PRC (ICSID Case No. ARB/14/25), the investor’s claims were dismissed as time-barred (see our blogpost here).
In addition, claims by PRC investors are becoming more numerous, likely reflecting increased outbound capital flows from China. One hurdle that investors must clear is to show that the tribunal has jurisdiction over the claim in question. The potential difficulty, at least with respect to 70+ pre-2001 "first generation" PRC BITs still in force, is that the arbitration provisions in those treaties extend jurisdiction only disputes "relating to the amount for compensation for expropriation."
The question of the scope of application of this jurisdictional grant is a matter of some debate. The narrow view is that such BITs limit the tribunal’s jurisdiction to a quantification exercise – in other words, the issue of whether expropriation has occurred must already be established in some other manner (i.e., through a domestic court proceeding). The broad view, on the other hand, is that the relevant treaties also establish a tribunal’s jurisdiction to determine whether expropriation has occurred. This debate has been addressed by two recent decisions.
On 31 May 2017, the broad view was adopted by a tribunal constituted of Ian Binnie (chair, appointed by the parties), John Townsend (investors’ appointee), and Zachary Douglas (Yemen’s appointee) in Beijing Urban Construction Group v Republic of Yemen (ICSID Case No. ARB/14/30). The arbitration related to a 2006 contract to build a $100 million international terminal for Yemen’s main airport in Sana’a. The tribunal found that the language of the 2002 PRC-Yemen BIT was inconclusive as between the narrow and broad interpretations. The tribunal therefore considered the context of the language used and placed emphasis on the fork-in-the-road provision in the PRC-Yemen BIT, which requires an investor to choose between local court and ICSID protection, thereby excluding an interpretation whereby the existence of expropriation would be determined in local courts, but losses quantified in arbitration. The tribunal followed the approach adopted by the tribunal and Singapore Court of Appeal in Sanum Investments Ltd v Laos (discussed below and reported here), and by tribunals in Tza Yap Shum v Peru (ICSID Case No. ARB/07/6), European Media Ventures v. Czech Republic (ad-hoc) and Renta 4 and Quasar de Valors v. Russia (SCC No. 24/2007 set aside by the Svea Court of Appeal).
On 30 June 2017, a tribunal constituted of Peter Tomka (chair), Yas Banifatemi (investors’ appointee) and Mark Clodfelter (Mongolia’s appointee) adopted the narrow view and declined jurisdiction to hear claims by three Chinese mining investors under the 1991 PRC-Mongolia BIT (China Heilongjiang ITCC v Mongolia (PCA Case No. 2010-20)). The award in this arbitration is not public; however, Mongolia’s counsel have reported the tribunal as concluding that the PRC-Mongolia BIT “restrict[s] the jurisdiction of an ad hoc arbitral tribunal to encompass only disputes which involve the amount of compensation for expropriation”, and that the tribunal disagreed with the investors’ view that the arbitration provision of the BIT would be deprived of any effect in practice, because “[a]rbitration 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 tribunal’s views on the fork-in-the-road provisions in the PRC-Mongolia BIT are not currently known.
These decisions follow a number of concluded or pending cases where Chinese investors have sought to rely upon the PRC’s extensive network of BITs:
Sanum Investments Ltd v Lao People’s Democratic Republic (Laos) (ICSID Case No. ADHOC/17/1): Sanum Investments (a company incorporated in Macau) claims under the 1993 PRC-Laos BIT in relation to Laos’ conduct after the settlement of a previous claim under the 1993 PRC-Laos BIT by Sanum Investments Ltd (PCA Case No. 2013-13). The PCA administered case was notable for confirming that the PRC-Laos BIT applies to Macau, in a decision that was upheld at the seat of the arbitration in Singapore (see our blogpost here). On 16 May 2017, the Tribunal in the new ICSID ad-hoc arbitration issued directions for hearing the merits of the claims.
Ping An v Belgium (ICSID Case No. ARB/12/29): Ping An sought compensation in relation to a US$2.3 billion write-off on its investment in Fortis, a Belgian-Dutch financial institution that was bailed out by Belgium in 2008. The claims under the 1984 and 2005 PRC-Belgium-Luxembourg BITs were dismissed on jurisdictional grounds in April 2015.
Tza Yap Shum v Peru (ICSID Case No. ARB/07/6): this case concerns the seizure of the bank account of Mr Tza’s company undertaken by the Peruvian tax authorities resulting in the substantive deprivation of Mr Tza’s investment. An award of US$780,000 was granted by the tribunal and was upheld in subsequent annulment proceedings.
In other developments in the region, the Republic of China (Taiwan) is reportedly facing its first known investment treaty claim, as a Singaporean investor has filed a claim under the Agreement between Singapore and the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu on Economic Partnership (ASTEP). Surfeit Harvest Investment Holding Pte Ltd is reported as claiming that the Taiwanese Ministry of Finance interfered with the company’s interests as a shareholder in Taishin Financial Holding Company, a Taiwanese financial institution.