ICSID tribunal upholds China’s jurisdictional objection

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

Summary

AsiaPhos Limited and its wholly owned subsidiary Norwest Chemicals, both Singaporean phosphate mining companies (“claimants”), submitted expropriation, FET, and full protection and security (FPS) claims against the People’s Republic of China (“PRC” or “China”) under the 1985 PRC–Singapore BIT (“BIT”) for alleged violations of China’s obligations with respect to the prohibition of mining in and around the Jiudingshan Nature Reserve and the national panda park in Sichuan province, China.

Having bifurcated the proceedings, the tribunal found that the scope of the BIT arbitration clause was limited to disputes regarding the amount of compensation for expropriation and declined jurisdiction. It also ordered the claimants to bear the costs of the proceedings and the respondent’s costs plus post-award interest.

The factual background and the dispute

In 1996, Norwest Chemicals invested in the Chinese phosphate mining sector by establishing a joint venture, Mianzhu Norwest. The latter acquired two phosphate mines, the Cheng Qian Yan and Shi Sun Xi, along with the relevant mining licences. In 2002, Norwest Chemicals acquired full ownership of Mianzhu Norwest, and mining operations commenced in 2008. In 2013, AsiaPhos Limited became the parent company of Norwest Chemicals and held a 55% equity interest in Deyang Fengtai, the owner of the exploration licence for the Yingxiongya barite mine.

Until 2017, the Sichuan Provincial Government permitted mineral exploration and exploitation in and around the Jiudingshan Nature Reserve and the national panda park, where the claimants’ mines were situated. In 2017, however, it prohibited mining and exploitation in those areas. This policy change resulted in the shutdown, sealing, and mandatory cessation of claimants’ mines and the non-renewal of their licences.

In response, the claimants argued that (i) the respondent’s measures constituted indirect expropriation under the BIT (Article 6); (ii) China disregarded their legitimate expectations that mining would have been permitted and their licences renewed in breach of the FET standard (Article 3(2)); (iii) China failed to afford FPS (Articles 4 and 3(2)) and (v) observe its commitments concerning the claimants’ investment (Articles 15 and 4).

The tribunal’s analysis

Respondent’s objection to jurisdiction

China argued that the dispute exceeded the tribunal’s jurisdiction. In its view, under Article 13(3) of the BIT, the tribunal was exclusively empowered to rule upon disputes over the amount of compensation for expropriation when expropriation was proclaimed or undisputed. Issues concerning its occurrence, legality, or nature fell within the mandate of national courts. This conclusion was supported by China’s treaty practice and the treaty’s object and purpose, which was not to offer unfettered access to arbitration, preparatory work, and context.

China argued that Article 13(3) had to be interpreted narrowly. The term “involving” and the expressions “the amount of compensation” and “resulting from” limited jurisdiction. Thus, it rejected that any dispute, with the amount of compensation as one of its elements, may be arbitrated. Instead, only disputes over its quantification fell within the tribunal’s jurisdiction. In essence, Articles 13(3) and (2) and 6(2) established a material segregation between domestic courts and tribunals.

China also clarified that investors were not required to resort to domestic courts prior to arbitration and that the fork-in-the-road provision applied only to disputes over compensation (Article 13(3)). It simply prevented investors from submitting them first to domestic courts and then to arbitration. China also denied that any litigation before domestic courts would have unavoidably led them to determine the amount of compensation due and triggered the clause.

On the other hand, the claimants argued that the arbitration clause covered both disputes over the quantification of compensation for expropriation and the latter’s occurrence and legality. For them, the term “involving” was inclusive. In addition, China’s treaty practice indicated that other terms would have been employed if the contracting parties were to limit their consent. Further, the expression “the amount of compensation” only limited the available remedies under the treaty, excluding restitution or declaratory relief. Under the proposed restrictive interpretation, the claimants argued that under the respondent’s interpretation, the tribunal would have had jurisdiction only over measures that China had formally recognized as expropriatory, excluding indirect expropriation, in contradiction of the fact that the BIT offered protection against direct and indirect expropriation.

Claimants also believed that Article 6(2) did not “draw such express line for a segregation of disputes” without an explicit reference to arbitration. Instead, due to its permissive language, it afforded investors the substantive right to resort to national courts. It neither restricted access to arbitration nor imposed a domestic litigation requirement prior to arbitration. In addition, for the claimants, a concept equivalent to expropriation did not exist in Chinese law, and domestic courts were unable to apply international law in their proceedings. Thus, any recourse to them would have been futile.

Lastly, the claimants argued that issues of compensation were heavily inseparable from the existence and legality of expropriation, as the latter was predicated upon the payment of the former (Article 6(1)). Thus, any recourse to domestic courts would have unavoidably triggered the fork-in-the-road provision and tainted the tribunal’s jurisdiction. Furthermore, any restriction upon access to arbitration would have contradicted the treaty’s object and purpose, which was to stimulate FDI through access to arbitration. By opting for arbitration, the claimants noted, the contracting states acknowledged the inadequacy of domestic courts.

The tribunal pronounced that its jurisdiction had to be predicated upon clear and unambiguous consent. It examined Articles 13(3) and 6 and held that consent did not cover claims for indirect expropriation. Instead, jurisdiction was limited to disputes that involved the amount of compensation and not the occurrence, existence, and legality of expropriation. The latter fell within the purview of domestic courts.

For the tribunal, after a 6-month cooling-off period, any investment dispute was to be brought before domestic courts except for disputes over the amount of compensation for expropriation. The narrow wording of paragraph 3, when compared to paragraphs 1 and 2, suggested that China consented only for a sub-group of disputes to be arbitrated, provided that the existence and legality of expropriation were established by domestic courts or undisputed. Moreover, the ordinary meaning of the term “involving” was non-conclusive, and the tribunal turned to the expression “the amount of expropriation” and the drafting history of Article 13(3) which revealed that jurisdiction was exclusively limited to disputes over the amount of compensation.

As regards the impact of Article 6(2) on China’s consent to jurisdiction and the interpretation of Article 13(3), the tribunal acknowledged that this due process provision ensured the right of foreign investors to have the legality of expropriation reviewed by domestic courts and did not restrict access to arbitration. However, as with every treaty provision, it had to be interpreted in context with Article 13(2) and (3) and the material segregation between disputes on expropriation and the amount of compensation due. Only the latter fell within the tribunal’s jurisdiction.

The tribunal further rejected the claimants’ view that any previous recourse to domestic courts would have triggered the fork-in-the-road clause. First, the clause’s object, purpose, and context suggested that it only concerned disputes on compensation for expropriation. Under Article 13, only investors had the option to submit those disputes to arbitration or domestic courts, and their decision had to be final. Second, the tribunal ruled that domestic courts, when called upon to decide the legality of expropriation, would have had to determine whether (adequate) compensation was paid and not sua sponte its precise quantum.

Lastly, the tribunal declared that the mere fact that the BIT aimed to attract FDI did not mean that the contracting states unconditionally waived their sovereign immunity from jurisdiction. In addition, the meaning of Article 13(3) was neither ambiguous nor obscure, and no resort to Article 32 of the VCLT was necessary.

Importing consent via the MFN clause?

The respondent claimed that the wording of Article 4, the objective of the dispute settlement clause, and the BIT’s object, purpose, and drafting history suggested that the MFN clause did not expand the tribunal’s scope of jurisdiction. Under Article 6, MFN treatment was granted with respect to investments. However, jurisdictional rights were exclusively conferred upon investors. Thus, they were excluded. Furthermore, the respondent believed there was an incongruence between the English and Chinese texts. Pursuant to Article 33(4) of the VCLT, the English text prevailed, and the term “in its territory” did not modify the term “investment.” Thus, the scope of the clause was geographically limited to the territory of the contracting parties. Lastly, for the respondent, Article 6 required the claimants to submit their dispute over the legality of expropriation to China’s courts, and the MFN clause did not help them circumvent that requirement as Article 6 was explicitly excluded from its material scope.

The claimants opined that the MFN clause applied to the dispute settlement provision. First, the ordinary meaning of the term “treatment,” they argued, indicated that the scope of this provision was broad and included substantive and procedural matters. They also posited that Article 13 was not included in the exhaustive list of exceptions of Article 4 and, therefore, was not exempted from its reach. Similarly, Article 6, though exempted, established a substantive right of due process for investors and not an obligation to resort to domestic courts. Thus, it did not impact jurisdiction. In essence, the MFN clause applied to the entire treaty except for the provisions explicitly excluded from its reach. Lastly, for the claimants, there was no divergence between the Chinese and English versions of the treaty, and the use of the MFN clause to expand the tribunal’s jurisdiction conformed with its object, purpose, and drafting history.

The tribunal was of the view that expanding jurisdiction by virtue of an MFN clause required a clear and unambiguous intent of the contracting states. It followed the Plama v. Bulgaria, European American Investment Bank AG v. Slovak Republic, and Berschader v. The Russian Federation tribunals’ view that such consent could not have been presumed or inferred without a clear and unambiguous stipulation. Otherwise, the risk of interpreting state consent differently for different states and massively expanding it would have loomed large. Thus, contrary to the UP and CD Holding v. Hungary ruling, the BIT did not provide for an expansion of the arbitration clause through the MNF clause. In addition, the tribunal interpreted the term “treatment” in light of its ordinary meaning and pronounced that it did not unambiguously include procedural issues. It also pointed out that Article 6 was explicitly exempted from the scope of the clause, a fact that signalled it was not meant to cover procedural issues. Lastly, it argued that the contracting parties diligently negotiated the treaty and limited jurisdiction. Thus, the latter was not to be enlarged based on an arbitration clause from an unrelated treaty, negotiated and concluded in an unrelated context.

Dissenting Opinion

In his dissenting opinion, Stanimir Alexandrov—appointed by the claimants—argued that the tribunal erred in excluding indirect expropriation claims from its jurisdiction. First, he argued that the ordinary meaning of the term “involving” was inclusive. The tribunal mistakenly perceived that disputes involving the amount of compensation were the same as disputes about the amount of compensation. He also believed that the tribunal failed to examine the ordinary meaning of the term and turned to the treaty’s drafting history before discussing its object, purpose, and context in a blatant disregard for the supplementary nature of Article 32 VCLT. Second, the context and structure of Article 13 confirmed this inclusive interpretation.

Alexandrov further rejected the segregation of different proceedings as the legality of expropriation was inseparable from the payment of adequate compensation. Domestic courts would have had to touch upon the latter to determine the former; therefore, the fork-in-the-road clause would have been triggered. Additionally, the language of Article 6(2) was permissive, and an effet utile interpretation suggested that investors could resort to either domestic courts or arbitration. Under the tribunal’s view, however, investors had no real choice of forum; they were obliged to resort to domestic courts, and Article 13(3) was essentially inoperative. Furthermore, the tribunal disregarded that the respondent, who bore the burden of proof, failed to prove that its courts were available to investors.

Lastly, Alexandrov argued that the scope of Article 13(3) needed no expansion and, therefore, no examination of the MFN clause was necessary. However, the tribunal’s reasoning, he claimed, was based on policy considerations; it failed to examine the ordinary meaning and context of the term “treatment” and mistakenly concluded, in light of Article 5, 6, and 11 exceptions, that the clause covered only substantive standards of protection. For Alexandrov, those exceptions indicated that what was not explicitly excluded remained within the provision’s scope.

Note

The tribunal was composed of Professor Klaus Reichert (president), Professor Albert Jan van den Berg (appointed by the respondent), and Dr. Stanimir Alexandrov (appointed by the claimants).

Author

Dimitris Kontogiannis is a Ph.D. candidate in International Investment Law and a Doctoral Teaching and Research Assistant in International Arbitration at the University of Geneva.