THE AUTHORS:
Aaron Tan Kai Ran, Associate at Holman Fenwick Willan (HFW)
Joel Ko, Graduate from Singapore Management University Yong Pung How School of Law
Kaelynn Kok, Graduate from Singapore Management University Yong Pung How School of Law
This award of the International Centre of Settlement of Investment Disputes (“ICSID”) has important ramifications for any investor who is considering bringing a claim for expropriation in China. In exercising his right to claim compensation, an investor must demonstrate the utmost care in commencing domestic Chinese proceedings in order to avoid engaging any possible fork-in-the-road clauses which could deny them recourse before any investment tribunal.
Background
Norwest Chemicals is a wholly-owned subsidiary of AsiaPhos Limited which are both incorporated in Singapore (“the Claimants”). The Claimants held mining and exploration licenses for two phosphate mines in China as well as a 55% equity interest in a Chinese Company Dayang Fengtai Mining Co Ltd, which holds exploration rights and a license to operate the Yingxiongya barite mine. All three mines were located in Mianzhu City, Sichuan in China.
During 2016 and 2017, China (“the Respondent”) adopted a new policy prohibiting mining around the Jiudingshan Nature Reserve in Mianzhu City (“the Policy”). Claimant alleged that this led to the shutdown, sealing and mandatory “exit” of the three mines and their associated mineral rights in 2017. The Claimant’s mineral licenses were not renewed after the imposition of the Policy, and no compensation was given to the claimants for this “exit” of their mineral rights or for their downstream operations.
The Claimant commenced a claim of expropriation against the Chinese government under the Agreement Between the Government of the People’s Republic of China and the Government of the Republic of Singapore on the Promotion and Protection of Investments (1985) (“the Treaty”). In response, the Respondent argued that the Tribunal had no jurisdiction as the dispute was not within the scope of their consent to arbitration. Hence, one of the key issues before the tribunal was whether the Respondent state consented to arbitral proceedings.
First Argument
The Tribunal held that the Respondent’s consent to arbitration only extends to the issue of quantum of compensation.
The Tribunal rejected the Claimants’ argument that the Respondent consented to arbitration by virtue of Article 13(3) of the Treaty. Article 13(3) of the Treaty reads:
“If a dispute involving the amount of compensation resulting from expropriation, nationalization, or other measures having effect equivalent to nationalization or expropriation mentioned in Article 6 cannot be settled within six months after resort to negotiation as specified in paragraph (1) of this Article by the national or company concerned, it may be submitted to an international arbitral tribunal established by both parties”
The provisions of this paragraph shall not apply if the national or company concerned has resorted to the procedure specified in the paragraph (2) of this Article.” The Tribunal interpreted Article 13(3) of the Treaty to mean that the Tribunal’s jurisdiction will only be engaged for issues of quantum when either the State acknowledges there was expropriation or that the parties seek recourse in the national courts at first instance to determine the legality of expropriation ([87]).
- Firstly, the ICSID Tribunal observed that Respondent’s consent to arbitration is limited to the issue of quantum of compensation based on a contextual interpretation of Article 13(3) of the Treaty ([89]).
- Secondly, the Tribunal suggested that where an investor requests specifically for the domestic court to decide only on legality, the domestic courts would unlikely address ultra petita the issue of compensation ([138]). This was also Respondent’s position – that under Chinese law, the Claimant can reserve the question of compensation and defer it to separate proceedings ([138]). Nonetheless, the Tribunal noted the Claimant’s concern that the fork-in-the-road clause may potentially preclude recourse to arbitration if domestic proceedings are commenced ([131]).
- Thirdly, the Tribunal also observed that the state would be unable to trigger the fork-in-the-road clause if they requested for domestic courts to rule on the amount of compensation due ([138]). This was because Article 13(3) of the Treaty expressly refers to situations where a “national or company” resorted to the dispute resolution procedure in Article 13(2) of the Treaty ([138]).
- Lastly, the Tribunal noted that the issue of compensation may be a factor in determining the legality of expropriation ([136]). However, determining the adequacy of compensation pertaining to the lawfulness of expropriation is distinct from determining the quantum of compensation ([139]). Even in situations where the domestic courts decided the former, it does not preclude the investor from seeking arbitral proceedings for the latter ([139]).
Second Argument
The Tribunal held that the scope of the Respondent state’s consent cannot be expanded by virtue of the Most Favoured Nation (“MFN“) clause in Article 4 of the Treaty.
The Tribunal rejected the Claimant’s argument that the Respondent’s consent to arbitration can be extended by the MFN clause within Article 4 of the Treaty ([219]).
- First, the Tribunal reiterated the requirement that parties can only consent to the Tribunal’s jurisdiction in a clear and unequivocal manner ([207]). The Tribunal noted the Plama v Bulgaria tribunal holding that dispute resolution provisions are typically meant to resolve disputes under that specific treaty, unless expressly agreed otherwise ([208]). Hence, where there is no such clear and unambiguous stipulation, then dispute resolutions clauses cannot be incorporated from one treaty to another on the basis of the existence of an MFN clause ([209]).
- Secondly, the Tribunal also noted the conflicting decision of UP and CD Holding v Hungary, where the tribunal allowed such an incorporation via the MFN clause ([210]). However, the Tribunal disagreed with this position as it risks undermining party consent in arbitral proceedings ([210]). In light of the absence of similar cases following the position in UP and CD Holding v Hungary, this decision to allow dispute resolution clauses to be incorporated between treaties via the MFN clause can be considered an anomaly.
Therefore, since the Treaty did not expressly provide for such an expansion of the dispute resolution clause through the MFN clause, the Tribunal held in favour of the Respondent’s narrower interpretation ([218]).
Key Takeaways
Typically, tribunals rely on the “triple identity” test as a prerequisite for a state to rely on a fork-in-the-road clause, where the state must show the following three steps:
- The dispute in both domestic court involved the same parties;
- The claim must have had the same object and purpose; and
- The claim must have had the same cause of action (see Pey Casado v. Chile (I), Award, 8 May 2008 at paras 483-485-486 and FREIF v. Spain, Final Award, 8 March 2021 at para 420). This decision is novel insofar that it crucially addresses how investors can circumvent the third step on the cause of action.
Traditionally, tribunals have taken the position that the cause of action will be different as long as the action pleaded in domestic courts pertains to contractual obligations pursuant to domestic law, and the action pleaded before an arbitral tribunal relates to international treaty obligations (see Zhongshan Fucheng v. Nigeria, Final Award, 26 March 2021 para 86; Toto v. Lebanon, Decision on Jurisdiction, 11 September 2009 para 211). However, this decision leaves open the possibility that a claim brought before the domestic courts and a treaty claim may be considered to have the same cause of action if they share the same subject-matter, even if they are framed under different legal regimes as was the case here in which the subject matter concerned the state’s alleged failure to compensate for the expropriation of the investor’s property.
This decision highlights how investors can avoid triggering fork-in-the-road clauses. To avoid engaging the fork-in-the-road clause, the investor would need to carefully plead their cause of action in the domestic courts in order to preserve their right to seek arbitration under any relevant BIT. This would require careful drafting of the cause of action and would entail that the investor potentially seek only declaratory relief before the domestic court in relation to the issue of liability before commencing a treaty claim. Such a careful approach would ensure that an investor would likely still retain his right to seek arbitral relief in relation to the quantum.
This is particularly the case for investors into China from the following countries in Annex A below which are subject to similar fork-in-the-road clauses. In such cases, the cause of action in the domestic court would also need to stipulate that the investor only seeks a domestic court judgement for liability and not with regard to the quantum of compensation. This would prevent the domestic court from deciding on issues within the scope of the treaty thereby preserving the jurisdiction of the tribunal.
For the issue relating to scope of consent in relation to MFN clauses, the position is that unless there is a clear and unequivocal stipulation that a dispute resolution clause is meant to be incorporated from one treaty to another, tribunals will not incorporate dispute resolution clauses by virtue of the existence of an MFN clause. This is in stark contrast to the prior landmark Maffezini v Spain, Decision of the Tribunal on Objections to Jurisdiction, 25 January 2000, at para 56, where an investor can latch upon more favourable dispute resolution provisions in other treaties. For investors, the decision serves as an indicator that relying on MFN to expand a state party’s consent to arbitration would likely be a futile endeavour.
Annex A – List of Chinese BITs with Similar Clauses as Article 13(3) of the Treaty
ABOUT THE AUTHORS
Aaron Tan is an associate at Holman Fenwick Willan (HFW) Singapore, specializing in arbitration, general disputes, commodities, and technology law. He has experience in arbitration cases under SIAC, ICC, and LCIA Rules, achieving successful outcomes in complex matters, including expedited procedures and disputes in shipping, commodities, and carbon markets. Aaron has also assisted and advised on AI regulation and technology bylaws. Passionate about the intersection of law and technology, he is a frequent speaker at technology and AI-related events, sharing insights on the future of legal technology and its impact on the industry.
Joel Ko is a recent graduate from Singapore Management University Yong Pung How School of Law, with a keen interest in arbitration and technology law. He has had multiple publications in these areas spanning various jurisdictions.
Kaelynn Kok is a recent graduate of the Singapore Management University Yong Pung How School of Law, with a strong interest in dispute resolution. She also has a sustained interest in technology and artificial intelligence, and has contributed to publications and moots in this area.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
