China-related investment arbitrations: three recent developments

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).

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Live audio webinar: Protecting your investments from political risk in a volatile world – 21 June 2017 – 1.00pm UK time

In this webinar, we will offer a disputes perspective on how to protect your investments from political risk in the current economic and political climate. Disputes lawyers are often brought on board when things have already gone wrong, tasked with limiting the fallout, managing a crisis or resolving a dispute formally or informally. However, we know what can go wrong and can therefore offer insight into what might have been done at the outset to reduce the chance of a dispute arising in the first place. We know what we need to build a solid claim and what would or could have made our client’s position in any dispute stronger.

In this webinar our panel will explore what we mean by “political risk” before looking at ways that risk can be mitigated. The topics our speakers will explore include:

  • Looking beyond the transaction: protecting your future position whilst negotiating
  • Contractual protections
  • Investment structuring to benefit from investment treaties
  • Political risk insurance: coverage, wordings and maximising policy response
  • Steps to protect yourself when an investment turns sour

Finally, we will talk through some practical points which can really aid a client’s position if and when a dispute does arise.

Speakers:

Andrew Cannon, Partner, International Arbitration, Paris

Sarah McNally,  Partner, Insurance Disputes, London

Iain Maxwell, Of Counsel, International Arbitration, London

To register for this event please click here.

Andrew Cannon
Andrew Cannon
Partner
+33 1 53 57 65 52
Sarah McNally
Sarah McNally
Partner
+44 20 7466 2872
Iain Maxwell
Iain Maxwell
Of Counsel
+44 20 7466 2646

 

 

 

ICSID issues first award involving China as Respondent, finding in host state’s favour

In an award dated 9 March 2017, the Tribunal in an ICSID arbitration between Korean investor Ansung Housing Co., Ltd and China dismissed all claims as time-barred. The Claimant's attempt to circumvent the limitation period by relying on the most favoured nation (MFN) clause did not succeed. The Tribunal came to this conclusion at an early stage of the proceeding, "with relative ease and despatch".

This is the first ICSID arbitration to involve China as the respondent state that has proceeded to a substantive hearing and resulted in an award.

See our previous blog on the case here

Click here for a copy of the Award.

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Background

The dispute related to the Claimant’s investment in a golf course and condominium development project in Jiangsu Province, China. On 12 December 2006, Ansung entered into an Investment Agreement with the local government, relating to a two-phase development of an 18-hole golf course and related facilities. In the course of 2007, Ansung observed a competing golf course nearby under construction and felt reluctance from the local government to grant Ansung the land necessary for the second phase of its development. Various rounds of communications took place between 2008 and 2011, but Ansung was not granted the land required for phase two, despite phase one having been completed. By mid-2011, it became clear that the local government would not honour its obligations under the Investment Agreement and Ansung would not be able to repay its loan without sufficient returns from its investments. In October 2011, Ansung was forced to dispose of all its assets at a significant loss, in order to avoid further losses.  On 17 December 2011, Ansung entered into a share transfer agreement for the purpose of the disposal, which was completed on 19 December 2011.

The dispute was submitted to ICSID under the Agreement between the Government of the Republic of Korea and the Government of the People’s Republic of China on the Promotion and Protection of Investments that entered into force on December 1, 2007 (BIT) and the ICSID Convention. Ansung submitted the Request for Arbitration electronically on 7 October 2014 and physically on 8 October 2014. The Secretary-General of ICSID registered the Request on 4 November 2014.

Limitation period

China filed an objection under Rule 41(5) of the ICSID Arbitration Rules, asserting that the Claimant’s claim was "manifestly without legal merit". Article 9(7) of the BIT bars an investor from making a claim if more than three years have elapsed from the date on which "the investor first acquired, or should have first acquired, knowledge that the investor had incurred loss or damage". China submitted, with authority, that the starting point for the purpose of limitation period is when the investor has knowledge of the fact of loss, not knowledge of the quantum of such loss. Ansung necessarily knew that it had incurred loss prior to the disposal of its investment in October 2011. The completion date of the transfer, when the quantum crystallised, is irrelevant. Ansung's claim was not registered by ICSID until 4 November 2014. China therefore argued that Ansung submitted the arbitration more than three years after it first acquired knowledge that it had incurred loss or damage, rendering the claim time-barred under Article 9(7) of the BIT.

The Tribunal agreed that Ansung must have known, well before October 2011, that its golf course project had suffered loss. Indeed, as the Claimant itself repeatedly pleaded, the purpose of the October 2011 disposal was to "avoid further losses". The Tribunal did not agree with Ansung's attempt to characterise 17 December 2011 as the date on which time started running, as that was the time when Ansung crystallised its loss, not the first date on which it knew it was incurring loss. The Tribunal also held that the day on which the Request for Arbitration was submitted, i.e. 7 or 8 October 2014, was the date on which Ansung made its claim for the purposes of tolling the limitation period. The Tribunal rejected China's argument that the relevant date was the date on which ICSID registered the claim, as that date is out of the control of the Claimant.

Taking all of this into consideration, the Tribunal concluded that the three-year limitation period had elapsed, and the claim was therefore "manifestly without legal merit".

MFN Clause

In the alternative, Ansung argued, the MFN Clause in Article 3(3) of the BIT saved the claim from being time-barred. Ansung contended that Article 3(3), which allows investors to import substantive rights from other treaties, should be interpreted to include procedural protections and rights in relation to dispute settlement procedures. The investment and business activities under Article 3(3) include "expansion, operation, management, maintenance, use, enjoyment, and sale or disposal of investments" as well as admission of investment. Ansung submitted that most Chinese BITs do not have any limitation period provisions, and that it should therefore enjoy the more favourable protection in such BITs to be free from the restriction of the three-year limitation period.

The Tribunal held that, upon a plain reading, Article 3(3) of the BIT does not extend to a state's consent to arbitrate with investors. The Tribunal considered that the limitation period in Article 9(7) pertains to the state's consent to arbitration, as a matter of international law. The Tribunal also drew a comparison with Article 3(5) of the BIT, which specifically extends MFN protection to an investor's access to domestic courts of justice, administrative tribunals and authorities. In marked contrast, such express reference to international dispute resolution is "conspicuously absent" in Article 3(3) of the BIT.

Consequently, the Tribunal did not consider that Article 3(3) of the BIT assisted Ansung in preventing its claim from being time-barred.

Award

The Tribunal was able to determine that China had established its Rule 41(5) objection "clearly and obviously, with relative ease and despatch" and its determination proved not to be "difficult". Even accepting the facts as pleaded by the Claimant to be true, the Tribunal found the claim was time-barred under Article 9(7) of the BIT and not protected by operation of the MFN clause. As such, the Tribunal found the claim to be "manifestly without legal merit" under the ICSID Arbitration Rules, Rule 41(5).

Having found in China's favour, the Tribunal awarded China its share of the direct costs of the proceeding, in the amount of US$69,760.55, plus 75% of its legal fees and expenses, plus interest.

The Tribunal consisted of Prof Lucy Reed (President), Dr Michael Pryles and Prof Albert Jan van den Berg.

Comment

Whilst each investment arbitration claim is particular to its underlying BIT, the limitation language in Article 9(7) of the BIT is reflected in a number of other bilateral investment treaties, including other Chinese treaties. In this case, the Tribunal held that time starts running when the investor first knows of the fact of its loss, not the quantum of such loss. This decision serves as a reminder to involve legal advisors early in any potential investor-state dispute, not least for the purpose of preserving the claim against any applicable limitation period.

Ansung also raised the hotly-debated question of whether MFN clauses extend to the dispute settlement provisions in BITs. ICSID tribunals in previous cases have accepted that applicability of the MFN clauses to dispute settlement concerned procedural obstacles, such as the requirement to resort to domestic courts for 18 months before instituting arbitration (see e.g. Siemens v Argentina, cited by Ansung). In the current case, the Tribunal viewed the limitation period as part of the state's consent to arbitrate. The Tribunal also contrasted Article 3(3) of the BIT (silent on the issue of international dispute resolution) against Article 3(5) of the same treaty, which expressly states that the investor is entitled to MFN treatment in terms of domestic dispute resolution.

This is the first ICSID arbitration to involve China as the respondent state that has proceeded to a substantive hearing and resulted in an award. However, it is not unlikely that we will see more treaty arbitrations involving Asian states in future, as disputes begin to arise out of the numerous inbound and outbound Asia-related transactions that have taken place over the last decade, and going forward.

Laurence Shore
Laurence Shore
Partner
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May Tai
May Tai
Partner
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Brenda Horrigan
Brenda Horrigan
Partner
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Jessica Fei
Jessica Fei
Partner
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Peter Chen
Peter Chen
Associate
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ICSID issues Practice Notes for Respondents in ICSID Arbitration aimed at helping states avoid investment disputes and demystifying ICSID procedure

ICSID has published Practice Notes for Respondents in ICSID Arbitration (the "Notes"), a 31 page practical guidance note on ICSID arbitration brought under the ICSID Convention or the ICSID Additional Facility Rules. The Notes aim to answer the questions most frequently asked of ICSID by respondent states and investors. In particular, they are intended to assist "novice" states who have never participated in an investment claim before, although their content will be of interest to prospective investor claimants too. The Notes are available in English, French and Spanish.

The Notes begin by considering conflict prevention mechanisms to help states avoid the prospect of an Investment Treaty claim. This section considers points such as:

  • the importance of careful drafting in investment treaties to ensure the scope of their protections are clear; and
  • preventing disputes arising by developing an awareness of investment obligations within government.

The next section of the Notes moves to consider the pre-arbitration phase of an investment dispute. It looks at how notice of a dispute is given by an investor and how states should respond to such notice. It stresses that states "should pro-actively assess the cost-benefit of settlement as soon as they receive notice of a dispute", whether informally through discussions or through formal negotiation, mediation or early neutral evaluation. The section also considers how a state can best prepare once it has become aware of a possible dispute, including developing a case and media strategy, choosing legal counsel and budgeting for legal costs.

The main portion of the Notes aims to demystify the procedural steps in an ICSID arbitration, setting out the typical sequence of the arbitration from the Request of Arbitration through to the Post Award phase. The analysis focuses on aspects of procedure which may be important to a Respondent while arbitral proceedings are ongoing, suggesting factors that may guide the state's position and providing an occasional warning of consequences (e.g. that non-participation will not prevent the formation of a Tribunal). The Notes also offer guidance on the typical split of costs between legal counsel, Tribunal and ICSID fees.

For all sections there is a list of further reading for those interested in more detail.

Comment

This is a useful publication pitched at true ICSID novices, offering both practical and tactical advice for states in how to avoid disputes and prepare effectively when disputes do arise. It also seeks to guide those states through the ICSID process. While relatively high-level, the Notes, together with the additional reading guide in each section, offer a strong foundation for those states with limited awareness of investment arbitration to educate their officials and approach future claims from a firmer foundation of knowledge. In particular, the Notes have the potential to help states to avoid taking steps that may, in the long term, harm their position. Those with practical experience of ICSID arbitration will likely be aware of the majority of what is contained in the Notes, but they may also find one or two helpful reminders or suggestions of matters to think about.

Iain Maxwell
Iain Maxwell
Of Counsel
+44 20 7466 2646
Maximilian Szymanski
Maximilian Szymanski
Associate
+44 20 7466 2596

Indonesia announces renegotiation of BITs

Since the Dutch government’s announcement last year that Indonesia had terminated the 1995 Bilateral Investment Treaty (BIT) between those countries, speculation has been rife regarding the status of Indonesia’s remaining BITs, signed with more than 60 countries.

On 12 May 2015, The Jakarta Post reported that the Indonesian Government intends to renegotiate its BITs, to bring greater certainty both to foreign companies doing business in Indonesia and to the Indonesian government. In particular, The Jakarta Post quotes Azhar Lubis, deputy director for investment monitoring and implementation at the Indonesian Investment Coordinating Board (BKPM), as suggesting that Indonesia may seek to restrict access to Investor State Dispute Settlement under its treaties to cases where the government has expressly consented that disputes with a particular investor may be referred to arbitration. Lubis stated that such a revision would be consistent with Indonesia’s 2007 Direct Investment Law, which stipulates that international arbitration claims should be filed based on an agreement between both parties. Continue reading

English court removes arbitrator based on justifiable doubts as to his impartiality

In its recent judgment in Sierra Fishing Company and others v Hasan Said Farran and others [2015] EWHC 140 (Comm), the English Court granted an application to remove an arbitrator under s24 of the Arbitration Act 1996 (the “Act“), which provides that a party may “apply to the court to remove an arbitrator on [the grounds that] circumstances exist that give rise to justifiable doubts as to his impartiality“.

The Court, applying the relevant test as articulated by the House of Lords in Porter v Magill [2002] and referring to the IBA Guidelines on Conflicts of Interest in International Arbitration (the “IBA Guidelines“), had no difficulty in finding that “the fair-minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased“. The Court’s decision provides helpful confirmation that it is the arbitrator’s duty to make voluntary disclosure to the parties of circumstances known to him which might give rise to justifiable doubts as to his impartiality, regardless of whatever steps may be available to the parties to discover their existence.   The judgment also provides helpful guidance on the steps which a party may take without losing their right to object to an irregularity affecting the tribunal or proceedings under s73 of the Act.

For further information on the revised 2014 IBA Guidelines, published on 28 November 2014, see our blog post here.)

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Inaugural conference of the European Federation for Investment Law and Arbitration: 23 January 2015

The European Federation for Investment Law and Arbitration (EFILA) will be holding its inaugural conference on 23 January 2015 at the Senate House in London. The topic of the conference is “EU law and investment treaty law: convergence, conflict or conversation?“. Herbert Smith Freehills is proud to be a sponsor of this important event which will bring together many of the key thinkers in this area, including politicians, civil servants, advisers, practitioners and academics.

For more information and details on how to reserve a place, please see the conference flyer here.

For regular updates on investment treaty law and other public international law issues, please subscribe to our Public International Law Blog (www.hsfnotes.com/publicinternationallaw).

NAFTA tribunal considers issues of res judicata and the customary international law minimum standard of treatment

In Apotex Holdings Inc. and Apotex Inc. v United States of America, (ICSID Case No. ARB(AF)/12/1), a NAFTA chapter eleven tribunal considered issues of res judicata and the customary international law minimum standard of treatment.

In a case notable for its discussion of res judicata and the customary international law minimum standard of treatment, a NAFTA Chapter Eleven tribunal has allowed jurisdictional objections over a significant part of the alleged claims. With respect to the claimants’ remaining claims, the tribunal concluded, on the merits, that the US had not breached any of its commitments under international law.

The tribunal analysed international jurisprudence on res judicata in detail, applying a flexible approach to the question of when claims will be precluded by a prior decision. Following previous NAFTA awards, the award explored the complex relationship between the customary international law minimum standard and the guarantee of fair and equitable treatment and full protection and security contained in NAFTA Article 1105(1).

It did so in the context of the claimants’ novel claims about the status of due process among the protections required by the customary international law minimum standard of treatment. However, the tribunal left for a future tribunal to decide whether NAFTA’s guarantee of most-favoured-nation (MFN) treatment can be used to expand the substantive protections under Article 1105 – a critical topic, in the light of all NAFTA states’ unanimous opposition to that interpretation. (Apotex Holdings Inc. and Apotex Inc. v United States of America, (ICSID Case No. ARB(AF)/12/1).)

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China sued by South Korean property developer at ICSID

This week, a South Korean property developer (“Ansung”) became the second ever investor to request ICSID arbitration against the People’s Republic of China (“PRC”) (Ansung Housing Co., Ltd. v. People’s Republic of China (ICSID Case No. ARB/14/25)). Little is known about the claims, which are reported to arise from the alleged actions of the provincial government in relation to Ansung’s investment in the construction of a golf and country club. Ansung’s counsel has told the publication Global Arbitration Review that:

The case is about a development project for a golf country club and condominiums in Sheyang-Xian, Jiangsu province. Ansung made investments in late 2006. Due to the various arbitrary and illegal actions and omissions of the Sheyang-Xian government, Ansung has been deprived of the use and enjoyment of its investment as its investment plan has been frustrated. As a consequence, in October 2011, Ansung was forced to dispose of its entire investment to a Chinese purchaser at a price significantly lower than the amount Ansung had invested toward the project. Ansung suffered more than CNY100 million and is seeking an award of damages.

The claims were registered by the Secretary-General of ICSID on 4 November 2014. The Tribunal has not yet been constituted.

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Exxon Mobil is awarded US$1.6 billion in ICSID claim against Venezuela – to be set off against award in parallel contractual arbitration

On 9 October 2014, a tribunal of H.E. Judge Gilbert Guillaume (President), Professor Kaufmann-Kohler and Dr. Ahmed Sadek El-Kosheri rendered a final Award on the case Venezuela Holdings and others v. the Bolivarian Republic of Venezuela, ICSID Case NO. ARB/07/27.

Five subsidiaries of Mobil Corporation (the “Claimants”) initiated the arbitration in 2007 claiming compensation for Venezuela’s alleged breaches of the Netherlands-Venezuela BIT in relation to a series of state actions which affected the Claimants’ investments in the Cerro Negro Project in the Orinoco Belt and the La Ceiba Project adjacent to Lake Maracaibo.

After 7 years of proceedings the Tribunal ordered Venezuela to pay to the Claimants: (i) US$9,042,482 in compensation for the production and export curtailments imposed on the Cerro Negro Project; (ii) US$1,411.7 million in compensation for the expropriation of their investments in the Cerro Negro Project; and (iii) US$179.3 million in compensation for the expropriation of their investments in the La Ceiba Project. The compensation amount is much closer to the valuations put forward by Venezuela in the arbitration, than the US$ 16.6 billion requested by the Claimants.

Of particular note in the Award is the Tribunal’s finding that Venezuela’s expropriation of Claimants’ assets was lawful. Even when no compensation was paid, the Tribunal concluded that: the expropriation was conducted in accordance with due process; it was not carried out contrary to undertakings given to the Claimants; and the Claimants did not establish that the offers made by Venezuela were incompatible with the “just” compensation requirement of Article 6(c) of the BIT.

This approach contrasts with the decision of the majority of the tribunal hearing a similar claim against Venezuela brought by ConocoPhillips (ConocoPhillips Petrozuata B.V., ConocoPhillips Hamaca B.V. and ConocoPhillips Gulf of Paria B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/30). In that case, the majority found that the expropriation was unlawful because Venezuela did not approach negotiations with ConocoPhillips in good faith and it only offered book-value, rather than fair market value compensation for the assets (Decision on Jurisdiction and Merits dated 3 September 2013).

There are a number of open questions about the level of compensation payable following an illegal expropriation as compared to a legal expropriation. In this case the Claimants submitted that the expropriation was unlawful and that, as a consequence, Venezuela was under the obligation to make full reparation for the damages caused, in conformity with international law. By contrast, Venezuela contended that even if the expropriation were deemed to be unlawful the indemnity to be paid to the Claimants must represent the market value of the investment at the date of the expropriation. The Tribunal decided that since it had found that the expropriation was lawful it did not need to consider the standard for compensation in case of unlawful expropriation or whether it would differ from the standard for compensation to be paid in case of lawful expropriation. It held that the compensation must be calculated in conformity with the requirements of the BIT which required “just compensation” and that “just compensation” should represent the market value of the investments affected immediately before the measures were taken. Therefore, it employed the date of the expropriation of Claimants’ assets (June 2007) as the valuation date, which had considerable significance in the amount of compensation since the market price of oil increased in the years that followed the expropriations.

The Tribunal also grappled with the parties’ respective cases on whether a risk of confiscation is part of the country risk that is taken into account in determining the discount rate for the purposes of valuing the assets using the Discounted Cash Flow Method. The Tribunal concluded that a confiscation risk remains part of the country risk and must be taken into account in the determination of the discount rate.

To avoid double-recovery, the Tribunal held that the amount already received by the Claimants under a parallel ICC Award should be discounted to the total compensation payable to the Claimants.

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