Singapore High Court overturns Tribunal's Award on Jurisdiction in Investor-State Arbitration

The Singapore High Court recently ruled in favour of the Government of Laos in a challenge to the jurisdiction of an arbitral tribunal hearing a claim involving a Macanese company, under the PRC-Laos bilateral investment treaty. This case represents one of the few occasions that a finding of jurisdiction in an investor-state arbitration has been referred to and reviewed by a domestic court Just as importantly, the decision demonstrates the extent to which the Singapore courts will examine the relevant treaties and context surrounding the dispute in order to determine the issue of jurisdiction. Click here for a copy of the judgment.

Background and context: 

The dispute related to whether the bilateral investment treaty (PRC-Laos BIT) between the People's Republic of China (PRC) and the Lao People's Democratic Republic (Laos) applies to the Macau Special Administrative Region of China (Macau). The court also had to decide whether, if the PRC-Laos BIT does so apply, expropriation claims fall within the ambit of Article 8(3) of the PRC-Laos BIT. 

The plaintiff in this matter was the Government of Laos and the defendant was Sanum Investments Limited, a company incorporated in Macau that had invested in Laos by developing casinos and related gaming businesses. On 14 August 2012, the defendant commenced arbitral proceedings by a notice pursuant to Article 8(3) of the PRC-Laos BIT, alleging, among other things, that the plaintiff deprived it of the benefits of its capital investment by the imposition of unfair and discriminatory taxes. Article 8(3) provides for ad hoc arbitration and, following the constitution of the tribunal, it was determined that Singapore would be the seat of the arbitration. In the notice of arbitration, the defendant argued that it fell within the definition of "investor" under the PRC-Laos BIT, because it was incorporated in Macau. 

The plaintiff objected to the Tribunal's jurisdiction on two primary grounds: first, that the PRC-Laos BIT should not apply to Macau and second, that the claim in question did not fall under the remit of the arbitration clause in the PRC-Laos BIT. Art. 8(3) of the PRC-Laos BIT provides that "a dispute involving the amount of compensation for expropriation" can be referred to an ad-hoc arbitral tribunal, if the parties otherwise fail to settle within 6 months. 

On 13 December 2013, the Tribunal delivered its award on jurisdiction. It decided that the PRC-Laos BIT applied to Macau and that it had jurisdiction to arbitrate the defendant's claims pursuant to Art. 8(3) of the PRC-Laos BIT. The plaintiff relied on section 10(3)(a) of the Singapore International Arbitration Act (IAA) to refer the question of jurisdiction to the High Court of Singapore. 

Preliminary issue: the justiciability of international law issues 

As a preliminary issue, the defendant submitted that the application concerned issues of purely international law which stemmed from an investment treaty arbitration and were therefore non-justiciable. The court rejected this argument. Relying on the English decision in Republic of Ecuador v. Occidental Exploration and Production Co [2006] 2 WLR 70, the court held that it had the necessary jurisdiction to interpret an international instrument where it was necessary to do so to determine a person's rights and duties under domestic law. In this case, where the domestic nexus was the parties' rights under section 10 of the IAA to review the Tribunal's ruling on jurisdiction, the court had jurisdiction to hear the matter.

Issue 1: application of the PRC-Laos BIT to Macau: 

Both parties agreed that Art.29 of the Vienna Convention on the Law of Treaties (VCLT) and Art.15 of the Vienna Convention on the Successions of States in respect of Treaties 1978 (VCST) were relevant in determining whether the PRC-Laos BIT applies to Macau. It is pertinent to note that, whilst the PRC and Laos are both parties to the VCLT, they are not parties to the VCST. Nevertheless, both parties agreed that the relevant articles of both conventions are rules of customary international law, and ought to apply. 

The effect of Art.29 of the VCLT and Art.15 of the VCST is that a treaty is binding on the entire territory of a contracting state unless it: (i) appears from the treaty that certain territories are excluded; or (ii) it is established that the contracting states had intended otherwise. 

The court accepted that the prima facie position was that the PRC-Laos BIT applies to the entire territories of Laos and the PRC, the latter of which undisputedly includes Macau. The issue was therefore whether any of the exceptions under international law applies to exclude the treaty's application to Macau. 

The exceptions:  

In respect of the first exception, the court agreed with the Tribunal's decision that no contrary intention appeared on the face of the PRC-Laos BIT, which is silent on whether it applies to Macau. 

The second exception, whether it had been established otherwise that the PRC-Laos BIT did not apply to Macau, was therefore the key focus of the court's deliberation. The court considered and assessed the following evidence: 

The Two Letters: these letters were correspondence between Laos and the PRC in January 2014 on the question of whether the PRC-Laos BIT applied to Macau. The first letter, from the Laotian Ministry of Foreign Affairs to the PRC Embassy in Laos, expressed Laos's view that the PRC-Laos BIT did not extend to Macau. In reply, the PRC Embassy stated that the PRC-Laos BIT did not apply to Macau "unless both China and Laos made separate arrangements in the future". The court found that the Two Letters "strongly support" the Plaintiff's position that the BIT did not apply to Macau, and considered that they affirmed an already common understanding between the two states that the treaty did not apply to Macau. 

It is worth highlighting that the Two Letters had not been considered by the Tribunal, as they were obtained and admitted into evidence after the Tribunal's had ruled on jurisdiction. Although the court noted that there was sufficient evidence to rebut the general position, even if it were restricted only to the evidence placed before the Tribunal, it is arguable that the Two Letters were pivotal in the court's eventual decision on jurisdiction, particularly in light of its somewhat equivocal findings on the probative value of the other evidence tendered (see discussion below). 

Other bilateral investment treaties (BITs): the court rejected analogies with BITs between Macau and other states, but accepted that Macau's ability to negotiate and enter into its own BITs suggested, to a limited extent, that the PRC's treaties do not automatically apply to Macau. 

Note to the UN Secretary-General dated 1999: the court placed no weight on this note, in which treaties that applied to Macau were listed, given this list included only multi-lateral treaties and was therefore irrelevant to the treaty in question, which is bi-lateral. 

The 1987 PRC-Portugal Joint Declaration: the court placed some emphasis on this declaration (recording Portugal's agreement to return Macau to the PRC in 1999) as evidence that the PRC's "one country, two systems" principle applies to Macau, suggesting that Macau would be considered separately from the rest of China. 

Hong Kong analogy: the court gave some thought and approval to the idea that China's position in relation to Hong Kong could provide guidance on China's position in relation to Macau. The same model was likely to have been followed , with the result that the PRC-Laos BIT would not automatically apply to Macau. 

2001 WTO Trade Policy Report: again, this document had not been adduced as evidence at the arbitral hearing. The court noted that the report was issued by a reputable organisation and states unequivocally that the PRC-Laos BIT does not apply to Macau. The court held that, whilst the report was by no means conclusive, it did provide clear support for the argument that the treaty does not apply to Macau. 

Conclusion on issue 1:  

Based on the above, the court held that there was sufficient evidence to rebut the general principle that the PRC-Laos BIT applies to Macau. 

Issue 2: assessing whether the expropriation claims fall outside of the scope of Art. 8(3) of the PRC-Laos BIT:  

In light of the court's determination on Issue 1, it was not strictly necessary for it to determine Issue 2. Nevertheless, the court set out its views on the issue. 

Issue 2 revolved around how broadly the Article 8(3) of the PRC-Laos BIT should be interpreted; in particular, whether expropriation claims fall outside the scope of Article 8(3),which provides that "a dispute involving the amount of compensation for expropriation" can be referred to an ad-hoc arbitral tribunal for determination. The Tribunal had interpreted the word "involving" broadly and considered it to be inclusionary rather than exclusionary. It reasoned that if the parties had intended to limit the jurisdiction of the Tribunal exclusively to disputes on the amount of compensation, other terms such as "limited to" would have been used. 

The court again took a different view from the Tribunal. It drew an analogy to the case of Tza Yap Shum v Republic of Peru, Case No. ARB/07/06, Decision on Jurisdiction and Competence (ICSID 19 June 2009) in which the Tribunal observed that communist regimes possess a certain degree of distrust regarding investment of private capital and are generally concerned about the decisions of international tribunals on matters over which they have no control. The court felt that these concerns were similarly present when the PRC-Laos BIT was concluded and that the BIT should be in this context. This would result in a narrow interpretation of Article 8, such that only questions of compensation that could be referred to arbitration. The court also noted that every BIT represents a negotiated bargain between two contracting states and that such bargains should not be lightly displaced without due consideration of the context in which they were made. 

Conclusion on issue 2:

The court held that the Tribunal had interpreted Art.8 (3) too broadly and that the Tribunal did not have subject matter jurisdiction over the defendant's expropriation claims. 

Discussion

The decision is significant insofar as it represents one of the very few occasions that a domestic court has been required to determine the jurisdiction of an investor-state arbitral tribunal.

Just as importantly, the decision sheds light on the manner in which the Singapore courts will approach such an issue. As is apparent from the judgment (which spans nearly 50 pages), the court undertook a very careful examination of factors such as the plain wording of the PRC-Laos BIT, as well as extrinsic evidence that could aid in the interpretation of the treaty. In order to provide some context to the language of the BIT, the court also took into account the 'communist regimes' of the countries in question when interpreting the BIT.  

Given that many countries have provided for ad hoc rather than institutional arbitration in their BITs, particularly in the ASEAN region, the decision is likely to have wider ramifications, particularly in building confidence in Singapore as a seat of future ad hoc investor-state arbitrations involving ASEAN and other states. This ties in with Singapore's aim to attract investor-state work (which initiatives include expressly enabling, via the 2013 edition of the SIAC Rules, the SIAC to hear investor-state cases), and more broadly, with its on-going initiative to promote itself as a world centre for arbitration.

For further information, please contact Alastair Henderson, Partner, Gitta Satryani, Senior Associate, Daniel Waldek, Senior Associate, Emmanuel Chua, Associate or your usual Herbert Smith Freehills contact.