Tribunal rejects jurisdiction over panda reserve dispute: the scope of PRC BITs set out in black and white

Mar 2023

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Key takeaways

The proliferation of bilateral investment treaties (BIT), multilateral investment treaties and free trade agreements (FTA) (i.e., treaties between two or more States promising to protect foreign investments) has led to a plethora of arbitration proceedings where private investors challenge State interference in their investments.  While most BITs and FTAs include a broad-ranging consent by the State to submit disputes with foreign investors to international arbitration, the consent to arbitrate found in most early PRC BITs is uniquely drafted and, as some recent tribunals have found, narrower in scope.

The Tribunal’s decision in AsiaPhos v People’s Republic of China highlights that Chinese outbound and inbound investors alike should carefully consider the scope of protections under PRC BITs when structuring investments into or from the PRC so as to ensure they have an effective remedy should they be treated unfairly by the host State.

Background

On 16 February 2023, the arbitral tribunal in AsiaPhos[1] held by majority that it did not have jurisdiction to hear claims brought by two Singaporean mining companies against the People’s Republic of China for its alleged expropriation of three phosphate mines. The dispute related to a 2016/17 policy to prohibit mining in and around the Jiudingshan Nature Reserve in the Szechuan Province of China, which had been set aside as a national panda reserve.

In its decision, the Tribunal considered the scope of the reference to arbitration contained in 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 (1986) (PRC-Singapore BIT).  The majority ultimately took a restrictive view, finding that the scope of the arbitration clause was limited to disputes over the amount of compensation awarded to an investor for an (undisputed or previously established) expropriation. In so doing, the Tribunal stated that disputes concerning the “occurrence” and “legality” of an expropriation (rather than the amount of compensation) can only be brought before the domestic courts of the host-State.

The majority also considered that, in the absence of unambiguous consent of both parties, and especially where a party is a nation state which generally enjoys sovereign immunity, the most-favoured-nation clause in the PRC-Singapore BIT would not operate to expand the scope of the arbitration clause.

The limited scope for arbitration under PRC BITs

In every investment-treaty arbitration, the precise scope of the investor’s rights and the State’s consent to arbitrate depends upon the specific terms of the treaty being relied upon. The AsiaPhos case is no exception, with the Tribunal dedicating a significant part of the award to considering the specific drafting of the PRC-Singapore BIT to determine the extent of China’s consent to arbitrate.

The PRC-Singapore BIT provides that all disputes that are unable to be settled by negotiation within 6 months may be brought before competent courts of the host-State (article 13.2). There is an exception to this general rule which sets out that, if a dispute “involving…the amount of compensation resulting from expropriation” cannot be settled within 6 months, it may be submitted to an arbitral tribunal, unless the claimant has already sought determination of the dispute by a domestic court (article 13.3).

The treaty separately provides that “the legality of any measure of expropriation may at the request of the national or company affected, be reviewed by the competent court of the Contracting Party” (Article 6(2)).

Given this, the majority of the Tribunal concluded that the investor needed to bring a dispute about whether the investment had been expropriated before the domestic courts of the PRC.

This approach – referring disputes about the amount of compensation to arbitration but all other disputes to domestic courts – is commonly found in ‘first generation’ PRC BITs.  These PRC BIT dispute clauses have given rise to two diverging lines of awards which were considered by the AsiaPhos Tribunal.

  • Tribunals that found their jurisdiction ‘includes’ the jurisdiction to determine the legality of an alleged expropriation

The first set of awards comprises the decisions in Tza Yap Shum v. Peru,[2] Sanum v. Laos[3] and BUCG v. Yemen[4] (respectively in relation to the PRC-Peru, PRC-Laos, and PRC-Yemen BITs).  The tribunals in each of those cases took the view that the States-party to those BITs consented to arbitrate claims concerning expropriation and, as such, the tribunals had an ‘inclusive’ jurisdiction to hear claims on the occurrence/legality of expropriation as well as the amount of compensation.

  • Tribunals that found that they only had jurisdiction to hear disputes regarding the amount of compensation

Conversely, in China Heilongjiang Int’l Econ. & Technical Coop. Corp. v. Mongolia[5] the Tribunal determined that a similarly worded dispute resolution clause in the PRC-Mongolia BIT (to that in the PRC-Singapore BIT) only empowered an arbitral tribunal to hear disputes over the amount of compensation for an expropriation. Similarly to AsiaPhos, the Tribunal held that it did not have jurisdiction to determine the legality or occurrence of expropriation and that the treaty required another forum – specifically, a local court –to determine whether or not an expropriation had occurred.

PRC-Australia BIT

The wording found in the PRC-Singapore BIT and PRC-Australia BIT are not identical and so it is unclear how the PRC-Australia BIT would be interpreted.

The key difference between the PRC-Singapore and PRC-Australia BITs is that instead of using the word “involving” article 12.2(b) of the PRC-Australia BIT provides that “where the parties agree or where the dispute relates to the amount of compensation payable…[either party may] submit the dispute to an Arbitral Tribunal”.  Should a claim be brought under the PRC-Australia BIT, a similar jurisdictional issue would likely arise concerning the scope of the treaty and whether a broader reading should be favoured, such that a dispute concerning the legality of an expropriation is ‘related’ to the amount of compensation payable, or conversely, that the scope of the consent to arbitrate is limited to a consideration only of the amount of compensation to be paid.

Summary

The majority decision in AsiaPhos reinforces the importance for investors to carefully consider the available treaty protections and applicable BITs when structuring their investment. Slight differences in the wording of otherwise comparable PRC BITs have resulted in divergent decisions by recent arbitral tribunals. Therefore, investors should seek advice in advance to evaluate the most favourable option for their proposed investment. It is also important to carefully consider which treaty to proceed under when an issue arises with the investment, particularly given the number of overlapping treaties within Asia that offer different options.

Where it is impractical to structure an investment through a pro-arbitration BIT or multilateral treaty, investors should consider the potential application of relevant host-State laws on the key legal risks associated with their investment by domestic courts or seek to agree a bespoke arbitration agreement with the host State (as discussed in our previous alert concerning investments in the Pacific).[6]

It is unclear what the tribunal in AsiaPhos would have determined on the merits of the case – i.e. whether the PRC’s directives to cease operations and the non-renewal of mining licences would constitute an unlawful indirect expropriation, and as a corollary, whether the creation of a panda reserve could be considered a “purpose authorised by law” (article 6.1 of the PRC-Singapore BIT).

States are increasingly reserving to themselves a right to regulate in respect of the environment especially in the context of increased government intervention for the purposes of achieving agreed emissions targets. Many recent BITs, multilateral trade agreements and partnerships expressly provide that where host-States take non-discriminatory actions for “public welfare objectives” including environmental regulation, such action cannot constitute indirect expropriation.[7] How much leeway these treaties give States to regulate is yet to be tested.

[1] AsiaPhos Limited and Norwest Chemicals Pte Limited v. People’s Republic of China, ICSID Case No. ADM/21/1, Award, 16 February 2023.

[2] Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Decision on Jurisdiction and Competence, 19 June 2009.

[3] Sanum Investments Limited v. The Government of the Lao People’s Democratic Republic, UNCITRAL, PCA Case No. 2013-13.

[4] Beijing Urban Construction Group Co. Ltd. v. Republic of Yemen, ICSID Case No. ARB/14/30, Decision on Jurisdiction, 31 May 2017.

[5] China Heilongjiang Int’l Econ. & Technical Coop. Corp. and others v. Mongolia, PCA Case No. 2010-20, Award, 30 June 2017.

[6] https://www.kwm.com/au/en/insights/latest-thinking/a-lesson-in-protecting-pacific-investments-from-government-intervention.html

[7] See for example, the EU-Canada CETA (2016), the Australia-Uruguay BIT (2019), the RCEP between ASEAN, Australia, China, Japan, New Zealand and the Republic of Korea (2020).

ABOUT THE AUTHORS

Edwina, a Partner in the International Arbitration team in Sydney, is an international law specialist with particular expertise in international arbitration and cross‑border China and regional Asian disputes. Edwina has acted as counsel and advocate in arbitrations in all the major arbitral institutions in international trade, shareholder, joint venture and IP disputes across a range of sectors.

Edwina’s working languages are English and Mandarin and she is admitted in Hong Kong and Australia. Edwina advises clients on climate and ESG risk mitigation including on the risks associated with climate-related statements and disclosures, claims about net-zero targets and general climate litigation risk as well as modern slavery and anti-bribery and corruption. Edwina has also acted on numerous disputes connected to clean energy and renewables projects spanning Australia, the Asia Pacific and Gulf regions.

Amanda leads KWM’s Dispute Resolution Team in South East Asia. Amanda enjoys getting stuck into knotty legal problems and learning all about her client’s businesses and industries. Based in Singapore since 2012, Amanda is at home in hawker markets as much as the arbitration centre at Maxwell Chambers. When not reading arbitration cases or drafting arbitration awards, pre-Covid Amanda used to love travelling with her family across Asia to clamber over temples, spot tigers, watch cricket and get harassed by monkeys. She is still getting harassed by monkeys hiking around Singapore. Amanda is proud her adopted home has the world’s best airport (Changi) and hopes to be flying again very soon.

Dom is known to his friends as Dommy C and simply as ‘Sir’ to his adversaries (and profile drafters). Sir has a formidable knowledge of arbitration law, paralleled only by his collection of Lego, and he demonstrates a capacity to construct creative, strategic and impenetrable structures with both. Dom speaks Italian like a native and French like a pro, having worked in Paris as well as The Hague for several years before a triumphant return to the KWM International Arbitration team in Sydney as a Senior Associate.

Annie is a solicitor in the Sydney office of KWM.

Sarah is an International Trainee in KWM’s Dispute Resolution Team in Singapore. She recently swapped Piccolo Lattes in Sydney for Kopi C Kosong at one of Singapore’s many hawker centres. Outside of the office, you can find Sarah planning her next overseas getaway or spending too much money on shoes.

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