13 October, 2016
Singapore Court of Appeal puts UNCITRAL proceedings back on the rails in its highly-anticipated first decision concerning an investor-state arbitration
The Court of Appeal’s decision in Sanum Investments Ltd v Government of the Lao People’s Democratic Republic [2016] SGCA 57 arose in the context of a closely-watched international investment dispute between Macau-incorporated Sanum Investments Limited (“Sanum”) and the Government of the Lao People’s Democratic Republic (“Laos”).
In August 2012, Sanum commenced UNCITRAL arbitration proceedings alleging (among other things) that Laos had wrongfully expropriated Sanum’s gaming investments in Lao PDR. Sanum’s claims were brought on the basis of Article 8(3) of a bilateral investment treaty signed by the People’s Republic of China (“PRC”) and the Lao Government (“PRC-Laos BIT”) in 1993, which provides:
If a dispute involving the amount of compensation for expropriation cannot be settled through negotiations within six months it may be submitted at the request of either party to an ad hoc arbitral tribunal. The provisions of this paragraph shall not apply if the investor concerned has resorted to the procedure specified in the paragraph 2 of this Article.
In December 2013, the UNCITRAL tribunal (“Tribunal”) dismissed Laos’ jurisdictional challenge vis-à-vis Sanum’s expropriation claims, being unpersuaded by Laos’ arguments that (i) the PRC-Laos BIT did not apply to Macau (which Portugal handed over to PRC in 1999, after the signing of the PRC-Laos BIT); and (ii) the expropriation claims were, in any event, not arbitrable under Article 8(3) (as Laos argued the provision allowed arbitration only in respect of the amount of compensation for expropriation).
The Tribunal’s affirmative jurisdictional ruling was overturned by the Singapore High Court in January 2015 but has now been finally restored by the Court of Appeal, sitting as a five-judge bench for only the fourth time in its history.
In its judgment of 29 September 2016, the Court of Appeal agreed with Sanum that (among other things): (i) the pieces of evidence Laos sought to rely on did not displace the default rule of state succession, pursuant to which the PRC-Laos BIT applied to Macau; and (ii) Article 8(3), which was not limited to issues of quantum, covered Sanum’s expropriation claims (involving as well questions of liability). The Court of Appeal thus held that the High Court “was wrong to conclude that the Tribunal lacked the jurisdiction to hear the claims”, thereby restoring the Tribunal’s affirmative jurisdictional ruling.
WongPartnership acted for the successful appellant, Sanum.
Our Comments / Analysis
The Court of Appeal’s decision – the first in the context of investor-state arbitration – has generated widespread interest within the international arbitration community and is significant for Singapore’s profile as an attractive seat for international (including investment) arbitration. The illuminating analysis of the complex public international law questions concerning treaty interpretation and state succession also affirms the Singapore Courts’ standing and capabilities in adjudicating cases of an increasingly international profile.
This Update takes a look at the decision.
In anticipation of Portugal’s handover of Macau to PRC in 1999, PRC and Portugal signed a joint declaration in 1987 (“1987 PRC-Portugal Joint Declaration”) stating that PRC would resume the exercise of sovereignty over Macau under a “one country, two systems” regime, and that following the handover, the application to Macau of international agreements to which PRC was or became a party “shall be decided by [the PRC Government], in accordance with the circumstances of each case and the needs of [Macau] and after seeking the views of the [Macau Government].”
PRC subsequently became party to the PRC-Laos BIT, which was signed in January 1993 and came into force in 1 June 1993. The PRC-Laos BIT made no express mention of its applicability to Macau after the handover. Nor was anything expressly said on the subject in other fora subsequently.
In 2007, Sanum began investing in the gaming and hospitality industry in Laos, through a joint venture with a Laotian entity. Disputes soon arose and in August 2012, Sanum commenced UNCITRAL arbitral proceedings against Laos pursuant to Article 8(3) of the PRC-Laos BIT, claiming (among other things) that Laos deprived it of the benefits to be gained from its capital investment through the imposition of unfair and discriminatory taxes.
Laos mounted a jurisdictional challenge in the arbitration, arguing that (i) the PRC-Laos BIT did not apply to Macau and thus could not be invoked in protection of a Macanese investor like Sanum; and (ii) in any event, Sanum’s expropriation claims were not arbitrable under Article 8(3) which limited arbitration to the question of “the amount of compensation for expropriation”.
After the Tribunal dismissed Laos’ jurisdictional challenge vis-à-vis the expropriation claims in December 2013, Laos appealed to the Singapore High Court (Singapore having been determined by the Tribunal to be the seat of arbitration), pursuant to Section 10(3)(a) of the International Arbitration Act. In those proceedings, Laos sought to adduce fresh evidence in the form of two Note Verbales exchanged in early 2014 between the Laotian Ministry of Foreign Affairs and the PRC Embassy in Vientiane, Laos (“2014 NVs”) in support of its position that the PRC-Laos BIT did not apply to Macau.
The Singapore High Court admitted the 2014 NVs, which it then relied on (among other things) to hold in Laos’ favour in January 2015 (in Government of the Lao People’s Democratic Republic v Sanum Investments Ltd [2015] 2 SLR 322). Sanum obtained leave to appeal in July 2015 and appealed to the Court of Appeal.
The key questions before the Court of Appeal were:
- Whether the PRC-Laos BIT applied to Macau following the handover
- in 1999; and
- Whether under Article 8(3) of the PRC-Laos BIT the Tribunal had subject-matter jurisdiction over Sanum’s expropriation claims.
This issue engaged questions of state succession and the impact which such succession would have on the treaty obligations of States. In particular, the Court considered and applied a customary international law rule known as the “moving treaty frontier” rule (the “MTF Rule”) (reflected in Article 29 of the Vienna Convention on the Law of Treaties (“VCLT”) and Article 15 of the Vienna Convention on the Succession of States in respect of Treaties (“VCST”)), which presumptively provides for the automatic extension of a treaty to a new territory as and when it becomes a part of that State.
As, under this Rule, a territory that undergoes a change in sovereignty passes automatically out of the treaty regime of the predecessor sovereign into the treaty regime of the successor sovereign, the PRC-Laos BIT would, in the Court’s words, “be presumed to automatically apply to the territory of Macau upon restoration of Chinese sovereignty with effect from 20 December 1999”. This presumption would hold “unless the MTF Rule has been displaced” by way of exception(s) to Article 29 VCLT or Article 15 VCST, i.e. if:
(i) It appears from the PRC-Laos BIT, or is otherwise established, that the application of the PRC-Laos BIT would be incompatible with the object and purpose of the BIT;
(ii) It appears from the PRC-Laos BIT, or is otherwise established, that the application of the BIT to Macau would radically change the conditions of its operations; or
(iii) An intention appears from the PRC-Laos BIT, or is otherwise established, that the BIT does not apply in respect of the entire territory of PRC.
The Court observed that the first two exceptions “cannot readily be applied to the present case” in light of the purpose and object of the PRC-Laos BIT, which was to protect investments for the purpose of the development of economic cooperation between PRC and Laos. In particular, the Court “[did] not see how an extension of the application of the BIT to Macau could be said to be incompatible with such a purpose” and was satisfied that Laos “could not establish that the extension of the application of the treaty to Macau would have the effect of radically altering the conditions for the operation of the treaty.”
As for the third exception, the Court concluded that there was “nothing in the text, the objects and the purposes of the PRC-Laos BIT, or in the circumstances of its conclusion that points to an intention to displace the [MTF] rule such that it would lead to the conclusion that the BIT does not apply to Macau”. To the contrary, there were factors present within the factual context of the case supporting the applicability of the PRC-Laos BIT to Macau, e.g. the fact that PRC and Laos chose not to expressly exclude the applicability of the BIT to Macau despite the reversion of Macau contemplated by the 1987 Portugal-PRC Joint Declaration.
The Court also found based on the evidence before it that Laos had not “otherwise established” any “intention that the BIT does not apply in respect of the entire territory of PRC”. Approving Sanum’s reliance on the “critical date” doctrine under public international law, the Court categorised the strands of evidence put forward by Laos in this regard into three chronological periods – (i) pre-handover, (ii) the period between the handover of Macau and the critical date (i.e., the date on which the dispute crystallised by way of Sanum’s commencement of arbitration), and
(iii) post-critical date – and noted that “special care would have to be taken in assessing the weight or relevance of” evidence adduced after the “critical date”.
The Court concluded that the evidence falling within the first two categories did not “otherwise establish” that contrary to the operation of the MTF Rule, the PRC-Laos BIT was not intended to apply to Macau. It also declined to place any evidentiary weight on evidence in the third category which Laos only adduced after the critical date (i.e., the 2014 NVs and a further set of Note Verbales exchanged between the PRC and Lao Ministries of Foreign Affairs in 2015 after the filing of Sanum’s appeal to the Court of Appeal).
Subject-matter jurisdiction under Article 8(3)
Sanum argued for a broad interpretation of “dispute involving the amount of compensation for expropriation”
The second issue concerned the proper interpretation of the phrase “dispute involving the amount of compensation for expropriation” in Article 8(3), pursuant to treaty interpretation principles embodied in the VCLT.
On Sanum’s case, a broad interpretation embracing any claim which includes a dispute over the amount of compensation for expropriation was warranted in order to (among other things) give effect to Article 8(3). In particular, Sanum argued that if Laos’ interpretation – that the investor must first go to a competent national court to determine whether an impermissible expropriation has occurred (pursuant to Article 8(2) of the PRC-Laos BIT), before turning to arbitration in respect of disputes concerning the amount of compensation for expropriation – was correct, Article 8(3) would be rendered ineffective because the fork-in-the-road provision therein (“[t]he provisions of this paragraph shall not apply if the investor concerned has resorted to the procedure specified in [Article 8(2)]”) would effectively preclude access to arbitration since the national court would, in determining whether an impermissible expropriation had occurred, have also determined the issue of compensation.
The Court agreed with Sanum, holding (among other things) that “[t]he words of the provision do not seem to us to be capable of accommodating the segregation of an expropriation claim in the way it was suggested such that the question of liability may be determined by the national courts leaving the issue of the quantum of compensation to be heard by an arbitral tribunal”, and that the context, object and purpose of the PRC-Laos BIT (of protecting investments) were also in line with Sanum’s broad interpretation of Article 8(3).
Accordingly, the Court concluded that the Tribunal did have subject-matter jurisdiction over Sanum’s expropriation claims and that the High Court erred in finding otherwise.
For further information, please contact:
Alvin Yeo, WongPartnership
alvin.yeo@wongpartnership.com
