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.

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.