4 April, 2017
In the recent case of Sanum Investments Ltd v Government of the Lao People’s Democratic Republic [2016] SGCA 57, Singapore’s apex court handed down its first decision dealing with the validity of an investment-treaty arbitration award. The Singapore Court of Appeal sat as a five-judge bench for only the fourth time in its history – comprising Sundaresh Menon CJ, Chao Hick Tin JA, Andrew Phang Boon Leong JA, Prakash J and Quentin Loh J. Furthermore, for the first time, the Court of Appeal permitted legal submissions from two amici curiae – experts on international law Professor Locknie Hsu of the Singapore Management University and Mr. J. Christopher Thomas, QC of the National University of Singapore.
Background
The decision concerned a dispute between a Macanese investor, Sanum Investments Ltd (“Sanum“) and the Government of the Lao People’s Democratic Republic. Sanum had invested in Laos’ gaming and hospitality industry via a joint venture with a Laotian entity. Subsequently, Sanum alleged that the Lao Government had levied unfair and discriminatory taxes, therefore depriving it of the benefits it otherwise would have derived from its investment. Hence, it commenced arbitral proceedings against the Lao Government pursuant to an investment treaty between the People’s Republic of China and Laos (the “Treaty“), which was signed in 1993.
The claim was brought under Article 8(3) of the Treaty, which states:
“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 Lao Government raised two preliminary objections to the Tribunal’s jurisdiction on the basis that, firstly, the Treaty’s protection did not extend to a Macanese investor. Secondly, the claim was not arbitrable, as it had gone beyond the permitted subject matter prescribed under Article 8(3) (i.e. only the amount of compensation was arbitrable, not the question of whether there was an expropriation, or whether an investor was entitled to any compensation as a matter of principle). Unpersuaded, the Tribunal dismissed these jurisdictional challenges.
The Tribunal had previously decided (after consultation with both parties), that the place of arbitration would be Singapore, and so its determination on jurisdiction was subject to Singapore court supervision pursuant to Section 10(3)(a) of the Singapore International Arbitration Act (the “IAA“). Hence, the Lao Government appealed the question of jurisdiction to the Singapore High Court (the “High Court“). The High Court decided that the Treaty did not apply to Macau, and even if it did, the Tribunal did not have jurisdiction to hear Sanum’s expropriation claims due to a restrictive interpretation of Article 8(3).
Sanum then appealed this decision to the Court of Appeal, who upheld the High Court’s finding that the Treaty extended to Macanese investors, but reversed its finding on subject-matter jurisdiction, preferring a broad interpretation of Article 8(3). As a preliminary issue, the Court of Appeal also stated in obiter dicta that while the interpretation of treaties in general were matters of public international law, the domestic Singapore courts were not only competent, but in fact obliged to consider these issues, as the parties had chosen Singapore as the seat of the arbitration and the supervisory jurisdiction for any challenges. It also held that a full standard of review should be conducted before the courts, notwithstanding the Tribunal’s original ruling, and that a national court was not obliged to give deference even to an eminent tribunal.
However, it did concede that a cogent and well-reasoned conclusion by the Tribunal may made its ruling persuasive.
The Moving Treaty Frontier Rule
In seeking to answer whether the Treaty protected Macanese investors, the Court of Appeal first identified the “moving treaty frontier” rule (the “MTF Rule“) which governs issues of State succession and the impact of such successions on a State’s treaty obligations. This rule stems from Article 15 of the Vienna Convention on Succession of States in respect of Treaties 1978 (“VCSST“) and Article 29 of the Vienna Convention on the Law of Treaties 1969 (“VCLT“). In essence, the MTF Rule presumptively provides for the automatic extension of a State’s existing treaties to a new territory, as and when it becomes part of that State. Since the territory in question undergoes a change in sovereignty, it passes automatically out of the treaty regime of the predecessor sovereign State into the treaty regime of the successor sovereign State. This is solely a presumption, and can thus be displaced on two grounds. Firstly, if the treaty itself shows an intention that it was not meant to apply to the extended territory. Secondly, if it has been otherwise established that the treaty was not meant to apply to the extended territory, even after the successor State had assumed (or resumed) sovereignty.
The Court of Appeal ruled that there was nothing to displace the presumptive effect of the MTF Rule in this case. It noted that, on a chronological basis, the 1987 Portugal-PRC Joint Declaration on the handover of Macau in 1997 pre-dated the 1993 Laos-PRC Treaty. Hence when the Lao and PRC Governments signed the Treaty, they must have contemplated its extension to Macau under the MTF rule. Furthermore, the Treaty granted each contracting state the option to give notice of termination one year before the expiration of its initial 10-year duration. The Court of Appeal considered it salient that at the end of the first ten years in 2002, there was no evidence of party exchanges concerning the exclusion of the applicability of the Treaty to Macau.
The Court of Appeal then proceeded to consider if it had been “otherwise established” that the Treaty was not meant to apply to Macau. The Lao Government had sought to rely on certain diplomatic exchanges sent between PRC and Laotian foreign ministries expressing the view that the Treaty was not to apply to Macau unless arrangements were made in the future. The Court of Appeal then applied the “critical date doctrine” to act as a time-constraint in determining the weight or relevance of evidence. In essence, the doctrine renders evidence that comes into being after the critical date as being of little weight. Post-critical date evidence is intended by the party submitting it to improve its position, thereby being self-serving. Since the diplomatic exchanges had only arisen after the critical date (in this instance defined as the date the arbitration proceedings were commenced), the Court of Appeal held that they had been adduced in order to contradict the earlier position, and should not be given any weight.
A Fork in the Road
The other key issue concerning the Tribunal’s jurisdiction was whether the subject matter in dispute fell under Article 8(3) of the Treaty. Article 8(3) of the Treaty provided that 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.” Article 8(3) is preceded by Article 8(2), which allowed parties, if they so chose, to resolve disputes through the national courts. If this was done, a party was not entitled to resolve the dispute through arbitration under Article 8(3) of the BIT.
The Lao Government argued for a restrictive interpretation of Article 8(3), arguing that recourse to arbitration was only available where the only issue in dispute was the compensation for expropriation. Since the present dispute involved not only the issue of compensation but whether there was expropriation, it was not something which could be submitted to arbitration.
Sanum however argued for a broader interpretation of Article 8(3), submitting that notwithstanding the reference to “a dispute involving the amount of compensation for expropriation“, all disputes arising for a claim for compensation for expropriation (including whether there was expropriation) could be submitted to arbitration.
The Court of Appeal noted that read together, Articles 8(2) and 8(3) of the BIT was a “fork in the road” provision which limited an investor’s access to arbitration if the investor had at the start opted to resolve the dispute in the national courts. Given that the restrictive interpretation would require the investor to first seek recourse in the national courts to determine whether expropriation had occurred, this would then render the ability to submit disputes to arbitration illusory, since arbitration would no longer be available once recourse to national courts was chosen. This would effectively be contrary to the principle of effective interpretation under international law. The Court therefore ruled that the broad interpretation was to be preferred.
Conclusion
For the same reasons that Singapore is an attractive seat for commercial arbitration, it is also well placed to grow as a seat for investment-treaty arbitrations. Indeed, the SIAC has recently released the SIAC Investment Arbitration Rules (taking effect on 1 January 2017), a specialized set of procedures for the conduct of international investment arbitrations. No doubt SIAC sees this area as an area of growth which Singapore should capitalise on. While Sanum Investments is the first decision of the Singapore Court of Appeal considering the issues arising out investment-treaty arbitrations, we can expect that it will not be the last.
For further information, please contact:
Leng Sun Chan SC, Principal, Baker McKenzie
lengsun.chan@bakermckenzie.com
