Jurisdictional hurdles in investment disputes in China – a recent judgment of the Swiss Federal Tribunal

Jurisdictional hurdles in investment disputes in China – a recent judgment of the Swiss Federal Tribunal

A. Point of departure

On January 11, 2024, the Swiss Federal Tribunal rendered a judgment on the interpretation of the bilateral investment protection agreement between the People's Republic of China and the Republic of Singapore of November 21, 1985 (BIT 85, the treaty lapsed in 2019). The judgement turned on a ruling by an ad hoc arbitral tribunal based in Switzerland (Geneva), which had to rule on a dispute between AsiaPhos Limited and Norwest Chemicals Pte Limited (claimants, registered in Singapore) on the one hand and the People's Republic of China (respondent) on the other (ICSID Case No. ADM/21/1, award of February 16, 2023). Although the facts of the case may seem remote and despite the fact that the relevant BIT is no longer in force, the judgement of the Federal Tribunal is nevertheless of high practical relevance. The Federal Tribunal examined the provisions under the Vienna Convention on the Law of Treaties and the principles of interpretation for international treaties laid down therein, explained that rules derived from commercial arbitration could not be transferred one-to-one to investment arbitration and reiterated the key principles governing the admissibility of new facts in its proceedings.

B. Arbitration proceedings

On August 7, 2020, the claimants had initiated arbitration proceedings against the respondent based on the BIT 85 requesting a finding on various violations of the agreement and compensation for the resulting damages.

The claimants had made investments in three phosphate mines in Sichuan province from 1996 onwards. The three mines were located in an area where the Jiudingshan Nature Reserve (Mianzhu) was later established in 2007 and where a national panda park was to be created subsequently. These developments initially left the phosphate mining unaffected. However, from 2017 onwards, the Sichuan provincial government banned mining in and around the Jiudingshan Nature Reserve and the national panda park, which led to the closure and sealing off of the three mines and the non-renewal of the mining licences held by the claimants (for a detailed overview of the facts claimed see ICSID Case No. ADM/21/1, award of February 16, 2023, section III (available at https://www.italaw.com/cases/10231). On August 7, 2020, the claimants initiated arbitration proceedings administered by the International Centre for Settlement of Investment Disputes (ICSID) on the basis of art. 13 para. 3 BIT 85 and requested a finding of various violations of the BIT 85 and damages.

In law, the claimants argued that the measures taken by Sichuan Province and the People's Republic of China were tantamount to expropriation pursuant to art. 6 BIT 85 and violated the general principles contained in art. 3 para. 2 BIT 85 ensuring fair and equitable treatment and the right to full protection and security (ICSID Case No. ADM/21/1, award of February 16, 2023, para. 36).

Already in the earlier arbitration proceedings it had been disputed whether the arbitration tribunal had jurisdiction at all, which the tribunal itself had denied. Before the Federal Tribunal the People's Republic of China argued that art. 13 para 3 BIT 85 constituted a very narrow arbitration clause. This arbitration clause essentially read as follows:

1. Any dispute between a national or company of one Contracting Party and the other Contracting Party in connection with an investment in the territory of the other Contracting Party shall, as far as possible, be settled amicably through negotiations between the parties to the dispute.
2. If the dispute cannot be settled through negotiations within six months, either party to the dispute shall be entitled to submit the dispute to the competent court of the Contracting Party accepting the investment.
3. If a dispute involving the amount of compensation resulting from expropriation, nationalization, or other measures having effect equivalent to nationalization or expropriation mentioned in Article 6 cannot be settled within six months after resort to negotiation as specified in paragraph (1) of this Article by the national or company concerned, it may be submitted to an international arbitral tribunal established by both parties.

The Respondent held that disputes concerning investments covered by the BIT 85 should primarily be adjudicated by the respective state courts. Only disputes concerning the actual amount of compensation for an expropriation, nationalisation or other measures having an effect equivalent to nationalisation or expropriation within the meaning of art. 6 BIT 85 should be brought before an international arbitral tribunal.

On the other side, the claimants had unsuccessfully argued that the wording of art. 13 para. 3 BIT 85 should be understood comprehensively, thus covering any dispute involving a claim for compensation arising from expropriation or similar. As a back-up argument, they also argued that the arbitration clause should be extended to the claim asserted by them on the basis of the most-favoured-nation clause contained in article 4 BIT 85, which was equally rejected by the arbitral tribunal in its award of February 16, 2023.

The claimants thereafter lodged an appeal with the Federal Tribunal Court, asserting that the arbitration tribunal had wrongly declined its jurisdiction to adjudicate the dispute (art. 190 para. 2 letter b Private International Law Act). The Federal Tribunal dismissed the appeal in its judgment of January 11, 2024.

C. The BIT 85 between Singapore and the People's Republic of China was not singular in appearance – Clauses in Bilateral Investment Treaties with China

According to the Federal Tribunal, the wording of the relevant arbitration clause in the case under its review was considered narrow. More recent investment protection agreements concluded by the People's Republic of China contain broader arbitration clauses, such as the one between Switzerland and the People's Republic of China of January 27, 2009 (BIT CH, SR 0.975.224.9). According to art. 11 para. 2 BIT CH, in the event of disputes arising from a breach of the agreement, the investor may, after a "cooling-off period", bring proceedings either before the national courts or before an arbitration tribunal. The treaty does not contain a restriction comparable to the BIT 85 between Singapore and the People's Republic of China, according to which only certain disputes were considered to be arbitrable. However, the People's Republic of China may require the investor to first lodge a domestic administrative review procedure, which not take longer than three months, before filing an arbitration claim (a similar caveat is also contained in the BIT between the Kingdom of the Netherlands and the People's Republic of China of November 26, 2001, https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/763/download).

In contrast, the previous agreement with the People's Republic of China of November 12, 1986 (AS 1987 589) also contained a restriction, according to which only disputes over the compensation amount owed under art. 7 of this agreement concerning "deprivation of property, compensation" could be submitted to arbitration by the investor, while "disputes over other issues relating to the present agreement" were only arbitrable with the consent of both parties concerned.

While the more recent bilateral investment agreements of the People's Republic of China generally no longer contain such restrictions, it should nevertheless be noted that in many instances the People's Republic of China requires that a domestic review procedure be carried out first. Particular attention should be paid to so-called "fork-in-the-road" or similar provisions. "Fork-in-the-road" provisions state that the dispute resolution route once chosen, i.e. either the state court proceedings or arbitration tribunal, is binding. In contrast, so-called "No-U-turn" provisions allow the foreign investor to initially initiate national proceedings, but then abandon them in favour of arbitration. However, a retrial or the filing of a new appeal before the national courts is then excluded. The BIT CH for instance allows a claim to be withdrawn from the national court and then submitted to arbitration. Other agreements appear to be stricter in this regard, such as the bilateral investment treaty between France and the People's Republic of China (https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/3342/download). The BIT between Germany and the People's Republic of China seems to follow a similar approach to the BIT CH and stipulates that a German investor can only invoke arbitration if it has first submitted the matter to an administrative review procedure under Chinese law and the difference of opinion persists three months after it has initiated the review procedure (as the BIT CH) and, if the matter has been submitted to a Chinese court, it can still be withdrawn by the investor under Chinese law (https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/7217/download). The BIT CH, on the other hand, makes no reference to national procedural law with regard to the withdrawal of the claim before the national courts. Such ambiguities in the phrasing of the individual provisions can potentially lead to considerable uncertainty and, in some cases, to the loss of the right to an arbitral tribunal. It is therefore essential to plan ahead when choosing the legal remedies.

D. The Federal Tribunal Judgment

1. What other arbitration tribunals have held, is inspiration at best

On a general note, the Federal Tribunal recalled that although arbitral awards from other investment disputes and scholarly opinions were accorded great significance, the Federal Tribunal Court in its practice interpreted the provisions of international agreements by itself. In doing so, it could take legal doctrine into account and draw inspiration from arbitral decisions. It held, however, that it should be noted that the awards issued in other arbitration proceedings in the area of international investment protection were neither binding for other arbitration tribunals nor for the Federal Tribunal and as such do not constitute a source of law (Federal Tribunal Decision 4A_172/2023, judgment of January 11, 2024, consid. 4.2.1.).

In the Federal Tribunal's view, the same also applied in the area of international investment disputes. Although no arbitral tribunal is bound by the rulings of other arbitral tribunals, it has nevertheless been observable for some time that arbitral tribunals take their cue from decisions of other arbitral tribunals and engage with such rulings, creating a type of unité de doctrine (see e.g. Jan Paulsson, The Role of Precedent in Investment Treaty Arbitration', in Katia Yannaca-Small (ed), Arbitration Under International Investment Agreements: A Guide to the Key Issues (Second Edition), S. 81-100; Beata Gessel-Kalinowska vel Kalisz, Konrad Czech, The Role of Precedent in Investment Treaty Arbitration, in: Stavros Brekoulakis (ed), Arbitration: The International Journal of Arbitration, Mediation and Dispute Management, Vol. 85, Issue 2, S. 162-168).

2. Jurisdiction of arbitral tribunals only where the parties agree clearly and unambiguously

The appellants in the present case initially relied on the principle that – provided a valid arbitration agreement existed - it must be assumed that the parties' wish had been for the arbitral tribunal to have exclusive jurisdiction. The Federal Tribunal countered that this argument, developed in the area of commercial arbitration, could not be applied in a cases of investment protection agreements which provided for several dispute resolution mechanisms or where the delimitation of state and private jurisdiction regulated in the BIT was disputed. The Federal Tribunal thus reaffirmed its established practice that the jurisdiction of an arbitral tribunal had to be based on the clear and unambiguous consent of the contracting parties (Federal Tribunal Decision 4A_172/2023, judgment of January 11, 2024, consid. 5.1.).

The further considerations of the Federal Tribunal deal with the question of the interpretation of art. 13 para. 3 BIT 85 and confirm the arbitral award, according to which the arbitration clause is to be understood as meaning that an arbitral tribunal can only invoked with regard to the question of the amount of compensation. In contrast, the arbitration clause does not cover the question of whether an expropriation, which can be the subject of compensation to be determined by arbitration, has taken place. The Federal Tribunal did not even address the complainants' objection that the state courts in the People's Republic of China could not determine the existence and legality of a material expropriation. According to the Federal Tribunal, the arbitral tribunal did not have to rule on whether the contracting states had fulfilled their obligation to guarantee sufficient protection against expropriation measures and adequate compensation within the meaning of the ISA in their territory (Federal Tribunal Decision 4A_172/2023, judgment of January 11, 2024, consid. 5.4.2.). Moreover, according to the Federal Tribunal in response to a further objection raised by the appellants, the fact that the limitation of the jurisdiction of the arbitral tribunal to the question of the amount of compensation and the coexistence of state and private jurisdiction may bring with it certain delimitation difficulties and - with regard to certain substantive issues - duplication of jurisdiction, did not lead to the result in a comprehensive jurisdiction of the arbitral tribunal as advocated in the complaint (Federal Tribunal Decision 4A_172/2023, judgment of January 11, 2024, consid. 5.4.1.).

3. Last minute expert testimony may be considered in certain instances

With their appeal, the appellants submitted a new expert opinion to prove their alleged inability to assert their compensation claims before Chinese state courts. With reference to the case law, the Federal Tribunal pointed out that the prohibition of introducing new items in art. 99 para. 1 Federal Tribunal Act only extended to the facts of the case, but not to legal means of attack and defence. Legal opinions therefore do generally not fall under the prohibition new items, provided they are submitted within the appeal period (art. 100 Federal Tribunal Act) and are intended to strengthen the legal argumentation of the appealing party. However, it should be noted that expert opinions on foreign law at least partially have the character of evidence where the parties are held to establishing the foreign law.

In the opinion of the Federal Tribunal, it was not clear from the appellants' submissions whether the alleged impossibility was of a legal nature in the sense of an exclusion of certain legal proceedings or whether there were actual obstacles to the successful completion of such proceedings. Once again, this shows which high demands are placed on the drafting of an appeal to the Federal Tribunal or a legal opinion to be submitted with it (Federal Tribunal Decision 4A_172/2023, judgment of January 11, 2024, consid. 3.).

E. Conclusion

The reviewed judgement again provides exciting insights into the world of international investment protection.

• When structuring international investments, the possibility of bringing disputes before a neutral arbitration tribunal should be given some thought, otherwise you could find yourself in the position of having to make do with local courts. The requirements for access to an arbitration tribunal should be carefully analysed. The Federal Tribunal regularly places high demands on the existence of an arbitration agreement.
• Principles that are applicable or recognised in international commercial arbitration cannot be transferred to international investment arbitration one-to-one. The latter follows its own rules.
• In the case of arbitration proceedings in Switzerland (and probably also elsewhere), possible appeal proceedings before the national courts should already be taken into account when exchanging briefs. The factual allegations likely to be relevant in any appeal proceedings, including the relevant evidence, in particular those relating to the applicable foreign law, should already be submitted in the arbitration proceedings.